
Glass 
Book 



i 5 






__„ 



THE METHODS OF TAXATION 



THE 

METHODS OF TAXATION 

COMPARED WITH 

THE ESTABLISHED PKENCIPLES 
OF JUSTICE 

BY 

David MacGregor Means 



NEW YORK 

DODD, MEAD AND COMPANY 

1911 



^ 

* %% ^ 



Copyright, 1909, by 
Dodd, Mead and Company 

Published, April, 1909 



if 6 ?y 



/* 



THE UNIVERSITY PRESS, CAMBRIDGE, U.S.A. 



CONTENTS 

Page 

Introduction vii 

Chapter 

I The Three Methods op Taxation .... 1 

II Nature and Limitations of Property . . 22 

III Unearned Property 55 

IY Practical Applications op the Proportion- 
ate Method 89 

Y Income Taxes 138 

YI Taxes on Expense 172 

YII Taxes on Transfers of Property at Death 211 

YIII The Diffusion of Taxes 236 

IX The Economic Method 275 

X The Cost of Collecting Taxes 330 

APPENDICES 

A. Extract from "Taxation of Personal Prop- 

erty" 363 

B. Taxation in Chicago 370 

C. Taxation of Land 373 



INTRODUCTION 

So many theories and problems are comprised under the 
general name of taxation as to make it difficult to treat 
them systematically. But, on examination, we discover 
principles that may be made to bring some order out of 
the apparent chaos. These principles may properly be 
called the methods of taxation; although the term 
" method," as here employed, is not quite free from am- 
biguity. It is often used as synonymous with measure; 
but the measures of taxation devised by legislators are 
infinite in number. It is obviously necessary to classify 
these measures, if we treat them at all, and the process 
of classification according to rational principles exempli- 
fies what is correctly denominated a method. At the same 
time, the practical applications of these principles are in 
common speech called methods, and it would be pedantic 
to ignore this usage, at least where to adopt it will cause 
no obscurity. 

There can be no really adequate criticism of the methods 
of taxation without some consideration of the right of 
property. To tax is necessarily to interfere with this 
right; the revenue of rulers is drawn from the revenue 
of subjects. !N"or can we determine the extent and manner 
of this interference without referring to the commonly 
accepted principles of justice. For certain purposes we 
may speak of the wealth of a people as an aggregate ; but 
we may not in practice disregard the fact that this wealth 
is owned by a vast multitude of individuals, whose re- 

vii 



viii INTRODUCTION 

spective contributions cannot be arbitrarily fixed. If we 
would examine the methods of taxation, therefore, we 
must first ascertain what views prevail concerning the 
institution of property, and what rules or standards of 
justice are generally recognized in dealing with it. 

No writer appears to have devoted himself to this 
specific inquiry. Works on taxation are numerous; but 
they are usually either historical and descriptive, or in- 
tended to apply particular theories. Most of the manuals 
of political economy have something to say about taxation, 
and many valuable monographs deal with problems that 
have from time to time demanded immediate solution. 
But we still lack a critical exposition of the relations of 
existing measures and systems of taxation to the rational 
bases of its methods; nor, perhaps, is it too much to say 
that the principles implied in such an exposition have 
never been clearly formulated. Hence many vigorous and 
really able commentaries on measures and systems of taxa- 
tion have been comparatively ineffective. No one can 
scientifically criticise the laws actually adopted by legis- 
lators without having some ideal method in his mind; 
and he can hardly influence public opinion unless he not 
only makes this ideal intelligible, but also establishes it 
on rational grounds. 

No doubt there may be permanently inconsistent ideals ; 
and in that event there will probably be permanent incon- 
sistencies in the laws regulating taxation. But, on exami- 
nation, these inconsistencies may be found to be less than 
would naturally be inferred from the animated conflicts 
which have raged over particular problems ; less, perhaps, 
than the participants in these conflicts themselves suppose. 
The controversy between the intuitional and utilitarian 



INTRODUCTION ix 

schools of ethics has been prolonged and frequently acri- 
monious; but when the rival methods are put to the test 
of practice, they are found to be surprisingly similar in 
their operation. Such may prove to be the case with other 
conflicting ideals ; but whether this be true in the case of 
taxation, or not, the inquiry can hardly fail to be useful. 
"No one is satisfied with the practical methods employed 
in assessing and collecting taxes, but there is little agree- 
ment concerning the reform of these practices. The first 
step in such a reform is to ascertain what these practices 
imply; not merely to catalogue them as formulated in 
laws, but to explain their results and compare them with 
the purposes which these results indicate, and with the 
ideals which are more or less clearly defined in public 
opinion. 

It should be borne in mind throughout the discussion — 
although the examination of the subject must be deferred 
to a later stage — that altogether the most prolific source 
of confusion, both in practice and in theory, is the preva- 
lent ignorance concerning the process commonly called 
the diffusion of taxes. Much reasoning, whether it re- 
lates to proportionate, or progressive, taxation, is vitiated 
when the nature of this process is recognized. Provided 
the individual who pays the tax can without greater ex- 
ertion increase his revenue to the extent which the tax 
decreases it, it is not very material to him whether the 
tax is proportionate or progressive, or indeed whether it 
is high or low. To a certain extent, the truth of this 
principle appears to be recognized, as in the case of cus- 
toms duties. The importer of dutiable goods pays the 
government its tax, but he is believed to reimburse him- 
self for his increased expense by selling the goods at an 



x INTRODUCTION 

enhanced price. The American Sugar Refining Company, 
for instance, pays a great many millions of dollars in 
taxes on the sugar which it imports, but in the public 
belief it recovers these taxes, and perhaps more than re- 
covers them, from its customers, who in turn recover them 
from the consumers of sugar. On the other hand the same 
public apparently supposes that an income tax must re- 
duce the incomes of those only who pay it. The con- 
clusions are on their face inconsistent, and there is 
perhaps no clear understanding of the logical process by 
which they are both maintained. 

It follows that we must distinguish between permanent 
and temporary measures of taxation, for in most cases a 
tax, when first imposed, will diminish the revenue of 
certain persons, but if it continues to be levied will 
diminish the revenue of others. In fact, temporary taxes 
hardly admit of scientific treatment, but must be regarded 
as forced contributions; for we cannot draw logical in- 
ferences unless we assume some degree of permanence in 
our premises. Our reasoning therefore must relate, for 
the most part, to a stable system of taxation, with some 
allowance for moderate changes. And this suggests a 
further caution, that no final judgment can be pronounced 
or any tax considered by itself, but only as related to the 
whole system of which it is a part. 

While such an inquiry as this is chiefly of scientific 
interest, there are two practical reasons for undertaking 
it. In the first place, the present laws and their adminis- 
tration in many cases oblige men to conceal their wealth 
by deceit, falsehood, and perjury; or else to withdraw 
from certain occupations because they cannot compete with 
those who employ these agencies. For the same reason, 



INTRODUCTION xi 

the great class of helpless persons whose property is con- 
trolled by trustees is everywhere subjected to exceptionally 
heavy taxation. In the second place the aggregate of taxa- 
tion has so enormously increased, and shows so marked a 
tendency to increase, as to make the future condition of the 
mass of our people a matter of grave concern. They are 
eventually the chief, although the ignorant, victims of 
misgovernment. " The common people of England," ex- 
claimed Adam Smith, " so jealous of their liberty, but 
like the common people of most other countries, never 
rightly understanding wherein it consists ! " — and we can- 
not except our people from this description. History warns 
us that progress can be checked by oppressive taxation, 
and we may well inquire into the tendencies of our pres- 
ent system. 



THE METHODS OF TAXATION 

CHAPTER I 

THE THREE METHODS OF TAXATION 

The evident sincerity with which, men advocate meas- 
ures of taxation that are theoretically irreconcilable is a 
striking proof of the confusion of thought prevailing on the 
subject. Probably most of this confusion is due to igno- 
rance; we are often unaware of the extent to which the 
ideals and methods that recommend themselves to us have 
been tested and condemned in the past. But the confusion 
does not all arise from this source. It is not uncommon 
for men to be influenced unconsciously by conflicting 
ideals, and to favor at different times and under different 
circumstances practices conforming to one or another of 
these ideals, without being aware of any inconsistency ; or 
at least without perceiving the cause of it. 

Thus, if we define taxation as the process by which 
some of the wealth of the subjects of a government is trans- 
ferred to their rulers, to be employed for public ends, per- 
haps most men would at first assent to the proposition that 
this process attained ideal perfection when the smallest 
possible quantity of this wealth was used up in the trans- 
fer; for even those who contribute gladly to public ends 
dislike to have much of their contributions remain in the 
pockets of the tax gatherers. So, too, the proposition that 
the best system of taxation is that which least interferes 

1 



2 THE METHODS OF TAXATION 

with the accumulation of wealth would probably command 
general assent. But it is conceivable that the expense of 
collecting the taxes so as to attain this result might be 
greater than if another end were in view. For, under a 
different system, there might be features so favorable to 
large creations of wealth by the " captains of industry " as 
to make the greater cost of collection of slight consequence. 
Protective duties, for example, are commonly declared to 
be advantageous, in spite of their cost, because they in- 
crease the prosperity of the whole people. But many would 
question the proposition altogether, holding the acquisition 
of wealth not the supreme end, either for individuals or for 
nations. One country, they would say, may be much richer 
than another of equal population; but the second country 
may be the happier. Were there no extremes of wealth and 
poverty, many of the problems which darken the future of 
modern societies could not arise, and the greater comfort 
of the common people might outweigh the diminished lux- 
ury of the rich. 

Such inconsistencies are by no means peculiar to the 
views of the ordinary man. They are illustrated to a re- 
markable extent in Adam Smith's classical chapters on tax- 
ation. The enduring merits of his presentation of the 
subject would in any event make it desirable to consider it ; 
and on account of its very inconsistencies it is the more 
instructive. As it would be a departure from the usual 
practice of writers on taxation not to quote the celebrated 
four maxims, they are given here, in a somewhat con- 
densed form. 

I. The subjects of every state ought to contribute 
toward the support of the government, as nearly as pos- 
sible in proportion to their respective abilities; that is, 



THE THREE METHODS 3 

in proportion to the revenue which they respectively en- 
joy under the protection of the state. 

II. The tax which each individual is bound to pay 
ought to be certain and not arbitrary. The time of pay- 
ment, the manner of payment, the quantity to be paid, 
ought all to be clear and plain to the contributor and to 
every other person. 

III. Every tax ought to be levied at the time, or in the 
manner, in which it is most likely to be convenient for the 
contributor to pay it. 

IV. Every tax ought to be so contrived as both to 
take out and to keep out of the pockets of the people as 
little as possible over and above what it brings into the 
public treasure of the state. 

The second and third of these maxims have been gener- 
ally accepted as indisputable; but they evidently involve 
much contentious matter. Eor, if it be desirable that the 
time of payment should be certain, and clear and plain 
to everyone, it might be necessary to fix the time and the 
manner of payment without reference to the convenience 
of the contributor. Taxes on real estate, for example, are 
almost everywhere made payable at a certain time, and 
the contributor is subjected to a penalty if he does not 
pay them at that time, whether it suit his convenience or 
not. Moreover, what are known as indirect taxes have 
been generally favored because those who indirectly con- 
tribute them are not aware of it, and are thus kept in 
ignorance, not only of the time and manner of payment, 
but also of the quantity to be paid. So the suggestion 
that every person should know what others pay seems to 
imply some political end which is not self-evident; and 
we see that in England much care is taken that the quantity 



4 THE METHODS OF TAXATION 

of the tax paid by the individual on his income shall not 
be disclosed to the public. 

For similar reasons, the fourth maxim seems not to be 
always reconcilable with the second and third, although 
the inconsistency may not be of great importance. And, 
practically, it may be urged, the three rules are but more 
specific statements of the principle that taxes should be so 
levied as to cause the least possible discouragement to the 
accumulation of wealth. As Adam Smith observes, al- 
though vexation is not, strictly speaking, expense, it is 
certainly equivalent to the expense at which every man 
would be willing to redeem himself from it. No doubt 
indirect taxes seem to take out and to keep out of the 
pockets of the people a great deal more than direct taxes, 
over and above what they bring in to the public treasury ; 
yet the manner in which they are levied is so convenient 
for contributors as greatly to diminish the force of this 
objection. It would be reasonable to maintain, however, 
that the convenience of the contributor is to be consulted 
through the imposition of such taxes as are really least 
expensive for him, rather than those that cost him more 
without his perceiving it. In this view the third maxim 
is subordinate to the fourth, and the three together may be 
treated as cases under the general principle of economics 
above stated. 

The first maxim, however, introduces a principle of an 
entirely different character, failure to notice which has 
occasioned later writers some perplexity. The last three 
of the maxims, as we have seen, relate to the economy of 
the process of taxation in the aggregate ; but the first lays 
down a rule of justice with reference to the rights of indi- 
vidual taxpayers. It does not state an economic principle, 



THE THREE METHODS 5 

and has no apparent relation to the accumulation of wealth. 
A tax may be certain, convenient, and economical, with- 
out being at all proportioned to the revenue of the tax- 
payer. In fact, such a tax might be collected entirely 
from the revenue of a small class in the community. On 
the other hand, a tax proportioned to the revenue of the tax 
payer might be both inconvenient and wasteful. If we 
could discover a tax that was at the same time economical 
and proportionate to revenue, it would accord with all four 
maxims; but it is significant that of the twelve classes 
described by Adam Smith, all, with one possible excep- 
tion, offend against one or more of his maxims, and nearly 
all offend against the first. 

These maxims, therefore, must be regarded as illustrat- 
ing rather than as dispelling the confusion which prevails 
concerning the methods of taxation. They are conflicting, 
and they contain nothing which enables us to say which 
should prevail. The fact that Adam Smith's treatise was 
largely descriptive and historical perhaps caused him to 
overlook this inconsistency; and, in fact, he introduces in 
his recommendations for reform a principle repugnant to 
his first maxim. But as this maxim evidently implies a 
fundamental principle, it has been scrutinized by later 
writers, and some of their criticisms will aid us in dis- 
tinguishing the chief methods of taxation. 

The comments of the late Professor Fawcett may be 
quoted mainly because they illustrate a misconception that 
still prevails. He observes : " Notwithstanding the defer- 
ence due to such a high authority, we believe that it will 
be found that, if the language employed by Adam Smith 
is closely analyzed, his first maxim of taxation is not only 
expressed in words which are obscure, but that it is almost 



6 THE METHODS OF TAXATION 

useless for any purposes of practical application. It will 
be observed that Adam Smith, in the first place, affirms 
that the subjects of a state ought to contribute to the sup- 
port of the government in proportion to their respective 
abilities: then he professes to make this statement of his 
principle more clear by enunciating it in different terms ; 
for he explains that ' contributing to a government in pro- 
portion to a person's abilities ' is the same thing as ' con- 
tributing in proportion to the revenue which he enjoys 
under the protection of the state.' These two statements 
of the principle, if they have any precise signification, do 
not mean the same but entirely different things." 

It is clear, however, that when Adam Smith said that 
ability to contribute was to be measured by revenue, he 
meant precisely what he said. The fact that other writers 
have used the term " ability " in a different sense is im- 
material, so long as Adam Smith defines the sense in 
which he uses it. Were there any obscurity in his lan- 
guage it would be wholly removed by the illustration of 
his meaning which he at once gives. He says : " The ex- 
pense of government to the individuals of a great nation 
is like the expense of management to the joint tenants of 
a great estate, who are all obliged to contribute in pro- 
portion to their respective interests in the estate." The 
meaning of this comparison is unmistakable. !No matter 
what the circumstances of the shareholders in a common 
enterprise may be, or what the inequality of their shares, 
the principle of contribution stated by Adam Smith is 
recognized by law and usage. 

Mill's criticism is from a different point of view. He 
does not expressly state what construction he puts on the 
first maxim, but he evidently disapproves of Smith's use 



THE THREE METHODS 7 

of the term " ability." " Equality of taxation," he de- 
clares, " as a maxim of politics, means equality of sacri- 
fice. It means apportioning the contribution of each per- 
son towards the expense of government, so that he shall 
feel neither more nor less inconvenience from his share of 
the payment than every other person experiences from his. 
This standard, like other standards of perfection, cannot 
be completely realized, but the first object in every prac- 
tical discussion should be to know what perfection is. . . . 
Setting out, then, from the maxim that equal sacrifices 
ought to be demanded from all, we have next to inquire 
whether this is in fact done, by making each contribute 
the same percentage of his pecuniary means. ... To take 
a thousand a year from the possessor of ten thousand, 
would not deprive him of anything really conducive either 
to the support or to the comfort of existence ; and if such 
would be the effect of taking five pounds from one whose 
income is fifty, the sacrifice required from the last is not 
only greater than, but entirely incommensurable with, that 
imposed upon the first. The mode of adjusting these in- 
equalities of pressure which seems to be the most equitable, 
is that recommended by Bentham, of leaving a certain 
minimum of income, sufficient to provide the necessaries 
of life, untaxed." 

We have here a definition of equal taxation essentially 
different from that formulated by Adam Smith. He main- 
tained that every subject should contribute in proportion 
to his revenue. Mill maintains that every subject should 
contribute in inverse proportion to the discomfort which 
he suffers from making his contribution. Now it is evi- 
dent that a psychological investigation into the quantity 
of pain endured by every individual taxpayer in a nation 



8 THE METHODS OF TAXATION 

is impracticable: it would be necessary to ascertain the 
amount of the wealth owned by the individual, and then 
to estimate the pain or discomfort caused by the various 
rates of deduction through taxation. Some allowance may 
perhaps be made for certain peculiarities in the circum- 
stances of individual taxpayers ; their net wealth, we may 
say, rather than their gross wealth, should be estimated. 
But the point is that we must assume a quantitative rela- 
tion beween feeling and material possessions; the pos- 
sessor of large wealth must be held to suffer less pain from 
the decrease of his revenue by a proportionate part than 
the poor man suffers by a corresponding decrease. Hence 
the conclusion follows that every subject should contribute 
not in a simple proportion, but in some geometrical pro- 
portion to his wealth or revenue. Mill indeed seems in- 
clined to go somewhat further than this, and to hold that 
the very poor should pay no taxes at all. As taxation 
according to this principle has come to be known as " pro- 
gressive," it will be convenient, in referring to it, to adopt 
that term. 

Here, then, we find illustrated three quite distinct and 
apparently conflicting methods employed by men in their 
reasoning about taxation. As we have said, the method 
suggested by Adam Smith in his first maxim may be desig- 
nated the proportionate method; that proposed by Mill 
may be called the progressive method ; and that deducible 
from Smith's other maxims we shall term the economic 
method. The ideals implied in these methods are pre- 
sumptively inconsistent. The ideal of the proportionate 
method is simply proportionality : that taxation should be 
contrived with the purpose of taking from every subject 
the same proportionate part of his wealth. This ideal 



THE THREE METHODS 9 

might be defined with reference to the subject as quanti- 
tative, or mathematical, equality. The ideal of the pro- 
gressive method may be called socialistic. The existing 
distribution of wealth is deemed unjust. A part of the 
possessions of those who have greater wealth should be 
taken from them, and given to, or applied to the use of, 
those who have less; and taxes should be contrived with 
this purpose in view. The ideal here is apparently equal- 
ity, or equalization, of sacrifice on the part of the subjects. 
The ideal of the third, or economic, method seems to be 
predominantly fiscal. The first and second ideals are per- 
sonal in character; they have reference to the circum- 
stances of the individuals constituting the state. The third 
is impersonal; it is concerned with the total amount of 
wealth, not with its ownership or distribution, although 
it seems to imply that the increase of the wealth of human 
beings is a desirable end, and that taxation should be con- 
trived with the purpose of interfering as little as possible 
with its attainment. 

Still, we are not compelled to assume that these ideals 
are necessarily attainable only by their respective methods. 
Taxes might conceivably be levied in accordance with 
either the first or the second ideal, and attain the third. 
We might find that the wealth of the community reached 
the highest possible figure under a progressive income tax, 
or under a general property tax, and in either case the 
fiscal ideal would be realized. But the converse of this 
seems less easily conceivable. It might be true that taxa- 
tion according to the economic method would result in 
quantitative equality, but no one appears to contend that 
such taxation would bring the socialistic ideal to pass. 

But however this may be, these ideals must be respec- 



10 THE METHODS OF TAXATION 

tively supreme in their different methods. A socialist 
might hold that, in taxation, the proportionate or the fiscal 
ideal was most satisfactory ; and those who accept the fiscal 
ideal are by no means committed to the proposition that 
the present distribution of wealth is ideally just, or even 
the best practically obtainable. They might even judge a 
state where there was less wealth, equally distributed, to 
be happier than one where there was more wealth but less 
equality. But they would hold either that the present 
order is so rooted in the nature of things that it cannot 
be altered by legislation, or that the proper way to reduce 
excessive accumulations of wealth in the hands of individ- 
uals is not to confiscate them after they have been acquired, 
but to remove the causes that enable men to acquire them ; 
for if those causes cannot be removed, the evil might be 
aggravated rather than cured by taxation. It is the end 
to be attained in levying taxes that differentiates the 
methods. In every method a certain purpose must con- 
trol. Other purposes must be collateral and subordinate; 
and it is immaterial to this inquiry that such purposes 
exist, or even what Utopias men imagine, except in so far 
as we find them conflicting with the premises necessary 
to rational procedure. 

Yet so many complaints are heard of the tendency of 
existing measures of taxation to encourage dishonesty, as 
to make it worth while to inquire whether we should not 
recognize a fourth method. The ideal of such a method 
would seem to be the promotion of virtue, and the purpose 
to be attained in taxation would be predominantly ethical. 
Taxes should be so levied as to elevate the morals of the 
taxpayer, or at least not to deprave them. It is certainly 
paradoxical to deny such a proposition, for we consider 



THE THREE METHODS 11 

that the whole system of legislation should promote virtue, 
and the laws regulating taxation are a part of this system. 
Hence we seem committed to a political and ethical in- 
quiry of rather wide scope. 

Now, to a certain extent, this is what is contemplated 
in the present investigation ; for both the proportionate and 
the progressive methods make professedly ethical claims, 
which it is our business to test. These methods, as we have 
seen, are personal; they propose in adjusting taxation to 
regard the circumstances of every individual. And as 
their very aim and purpose is declared to be the attainment 
of justice, it seems absurd to say that the effect of such 
adjustment on the morals of the individual is immaterial. 
For, however we define the concepts of virtue and justice, 
we certainly do not think that justice can be attained by 
discouraging virtue. Should it appear, therefore, that the 
practical application of the first two methods actually 
hinders virtuous action, the fact that they profess the at- 
tainment of justice as their ideal would not save them 
from condemnation. 

It is true that the economic method makes no such 
claims. It professes to be impersonal; it is apparently 
concerned with the increase of wealth rather than the in- 
crease of virtue. Indeed, as we shall see, it abandons the 
attempt to ascertain the wealth of the individual as futile ; 
and if we cannot even find out how rich every man is, we 
certainly cannot estimate the extent of his virtue. Never- 
theless, the moralist can say that the promotion of virtue 
is a criterion to which the economic method, like the others, 
must submit. For if we should find by experience that this 
method does deprave men, we should certainly condemn it ; 
and hence it is legitimate to inquire into its ethical results. 



12 THE METHODS OF TAXATION 

And, as a matter of fact, the advocates of this method 
claim as one of its chief merits that in practice it removes 
much temptation to falsehood and dishonesty, and relieves 
virtuous people from the penalties to which they are sub- 
jected by the other methods. These claims, of course, 
challenge examination, and imply the supremacy of the 
standard that might at first seem irrelevant. Yet, after 
all, a standard so purely formal as this seems to be prop- 
erly described as a test or criterion of methods of taxation, 
rather than as itself a method. 

It is to be added that the fact that taxes, however levied, 
are always and necessarily paid by persons, is a dominating 
consideration. The exaction of these payments cannot be 
successfully carried on in defiance of the convictions of 
those who make them. Every taxpayer is disposed to 
scrutinize the amount of his contribution and the manner 
in which it is collected, and to compare his payments with 
those of his neighbors. Under such conditions the legis- 
lators cannot ignore ethical considerations; their demand 
for recognition is so imperative as to make the fiscal end 
appear subordinate. If taxation is to be scientific, it must 
be a continuous and substantially permanent process, which 
it cannot be if its practical applications are condemned 
by public opinion. That opinion would incessantly in- 
terrupt and alter the process, thereby destroying the eco- 
nomic gain of permanency. The fiscal method, in short, 
would be impracticable if men were rationally convinced 
that it was unjust. 

As has been intimated, however, there is in theory 
nothing incompatible between a fiscal and an ethical end. 
The two ends may coincide; and in the sequel we shall 
perhaps find reason to believe that they tend to coincide. 



THE THREE METHODS 13 

But this is far from self-evident, and in such a community 
as ours, with such a confusion of taxes as here exists, it 
would be idle to examine methods of taxation without 
some preliminary inquiry concerning prevalent concep- 
tions of justice. Under a despotism, or even under an 
aristocracy, taxation, when not very oppressive and vexa- 
tious, may be regulated without asking whether its methods 
would meet the approval of the mass of the subjects, if 
they were consulted. The two hundred and fifty millions 
of people inhabiting British India, for example, are taxed 
at the discretion of a very few men, according to principles 
which the taxpayers no more think of questioning — or of 
understanding — than they do the causes of the monsoon. 
Much the same is true of taxation in such a country as 
Russia ; but in a community where public opinion is alert, 
no system of taxation can be accepted as permanent unless 
rational grounds are offered for holding it just; or, at 
least, as resulting in as near an approach to justice as 
could be attained under any other system. 

But when we ask what is meant by justice, we find our- 
selves at once perplexed. Philosophers, from Plato to 
Spencer, have labored to define it. The search has been 
instructive and fruitful, but it has not resulted in a defini- 
tion that has been universally, or even generally, accepted, 
or that appears to apply satisfactorily to all the cases 
arising in practice. In truth, the word has many mean- 
ings. The standards of morality are not the same for all 
races, or for all members of the same race. They vary in 
different sections of the same country, and among different 
classes in the same community. In the last analysis every 
responsible human being must have his own standard of 
right and wrong, and it is only by yielding and modify- 



14 THE METHODS OF TAXATION 

ing his own convictions that he can attain a modus vivendi 
with his neighbors. Hence if any standard of right or 
justice can be said to prevail in a society, it must be the 
result of compromises so numerous and so extensive as to 
make scientific definition very difficult. To compromise 
is to deviate from a standard; and, where many indi- 
viduals are concerned, the degrees of variation and the 
reasons for them become quite incalculable. 

"Nor may we forget to what extent the judgments which 
men pronounce are, if not irrational, at least unrational. 
As Swift said, the proper definition of man is not animal 
rationale, but at most rationis capax. As men's conduct 
is largely determined by instinct or impulse, so their con- 
clusions are affected by prejudice and habit. 1 It follows 
that large fields of human activity are almost outside of 
the scope of reason. Precedent commonly controls, and 
whatever has been held just in the past continues to be 
called just in the present. Under such conditions, progress 
unavoidably brings confusion. Precedents become often 
absurdly inapplicable ; " vested rights " are transformed 
into vested wrongs; and law, administered according to 
obsolete standards, may illustrate the maxim " Summum 
jus, summa injuria" 

For the present purpose, at any rate, we cannot proceed 
on the theory that justice is something so absolute and 
permanent in its nature as to be susceptible of exact defi- 
nition. To be universally applicable, any definition must 

1 " In fact most persons are liable to confound intuitions on the one 
hand with mere impressions or impulses, which to careful observation 
do not present themselves as claiming objective validity; and on the 
other hand, with mere opinions, to which the familiarity that comes 
from frequent hearing and repetition often gives an illusory air of self- 
evidence which attentive reflection disperses." Sidgwick, Methods of 
Ethics, Book III, Chap. XI. 



THE THREE METHODS 15 

be so general in its terms as to be practically useless. 
All would agree that laws that promote the general welfare 
are just; but if we should examine the numerous acts 
of Congress that profess to comply with this constitutional 
mandate, we should find ourselves no nearer a satisfactory 
definition of justice. We must be content to adopt, as on 
the whole most rational, the standards proved by expe- 
rience to be most generally acceptable, to reconcile their 
differences so far as we can, and to show to what extent 
men fail to apply consistently the standards which they 
actually recognize. 

Of course it is axiomatic that propositions accepted as 
self-evident must not conflict with one another; for in 
such event not all the propositions can be true. In the 
case of an individual man professing to adopt his con- 
clusions rationally, there is no escape from the necessity 
of harmonizing his intuitions. But when we consider a 
multitude, even as members of the same society, we can- 
not insist on such harmony. Hence we are limited to 
universal consent as the test of the truth of the funda- 
mental principles of justice. The maxim quod semper, 
quod ubique, quod ab omnibus, furnishes an empirical 
standard quite as high as can be here applied. Our 
course, therefore, must be to proceed per enumerationem 
simplicem; to collect the current judgments concerning 
just methods of taxation, and to compare them with such 
leading principles or practical rules as are universally 
accepted as politically just, or are at least not rejected 
on rational grounds by any considerable number of men. 

It is true that universal consent does not establish any 
proposition scientifically; too many absurdities have in 
the past been implicitly endorsed by public opinion for 



16 THE METHODS OF TAXATION 

such a contention to maintain itself. Nor may we expect 
that those who are in the habit of speaking of justice — 
usually in figurative terms and with emotional emphasis 
— as something absolute and unchangeable, will be content 
to subject this sublimated conception to the vagaries of 
popular opinion. But as these persons have not presented 
a definition of this exalted entity which has either been 
generally accepted, or conclusively established on rational 
grounds, their claims do not need to be considered in the 
present inquiry. To frame on rational principles an ideal 
system which every one must accept as just, would cer- 
tainly be desirable, if it could be done; but it is more 
than is here attempted. Still, we may say, it would open 
the way for the establishment of such a system if men 
could be brought to see clearly what principles they do 
accept as essentially just, and what corollaries are implied 
in these principles. They may not at present be fully 
aware of the methods which they actually employ, but 
they may recognize them when explained, and admit their 
cogency in cases to which they might not, without re- 
flection, have supposed them to be applicable. 

The difficulty of the inquiry is somewhat lessened, be- 
cause what we are concerned to discover is that quality 
in the acts of our rulers which men commonly approve 
as just, rather than such a quality in human acts gener- 
ally. There must of course be some analogy between the 
acts of an individual and those of such a corporation as 
a government. Every government is administered by 
men, and they, and the citizens who maintain them in 
office, are in some degree responsible for the morality of 
governmental conduct. But the rules applicable to such 
conduct are not only less severe than those of the indi- 



THE THREE METHODS 17 

vidual conscience, bnt are also far simpler. Diplomatists 
have usually been gentlemen, and, as individuals, have 
regarded lying as dishonorable. But in former times, 
if not now, they have felt it not incompatible with honor 
to lie for their governments; and soldiers do not hesitate 
at deeds which, as human beings, they execrate. When- 
ever one person acts as the agent of another, responsibility 
is lessened and moral standards are lowered. The officer 
of a government, like the servant of any other corpora- 
tion, throws the responsibility for his acts on his em- 
ployers; and rulers and directors divide the burden with 
one another and with those who have placed them in their 
positions. It is hardly possible to find an instance in 
history where the conduct of a government has been such 
as fully to meet the requirements of the rules of morality 
accepted by its subjects, and we must therefore apply a 
comparatively low standard in testing the justice of gov- 
ernmental action. 

That the rules applicable to the conduct of government 
are simpler than those affecting individual morality, is 
evident when we consider how small a portion, relatively, 
of human conduct falls under the control of the magis- 
trate. Religion is now almost exempt from governmental 
interference; most duties arising from the domestic re- 
lations and those of friendship, even those of ordinary 
intercourse, do not very often need to be enforced by law. 
Moreover we do not need to inquire into the justice of all 
the acts of government, but only a special class of them. 
For example, if we were obliged to ask concerning the 
justice of the purposes for which the government spends 
its revenue, the field of investigation would be greatly 
broadened and its nature would be very different. It is 

2 



18 THE METHODS OF TAXATION 

not always practicable to ignore questions of this kind ; but 
to discuss them adequately would so complicate our under- 
taking that we are compelled to assume that revenue is 
to be properly spent, and confine ourselves to the exami- 
nation of the justice of the methods by which it is raised. 

This course has, it is true, an arbitrary look. It seems 
reasonable to say that the purpose of levying taxes is to 
confer benefits, and that we cannot properly decide on 
the justice of the methods of imposing burdens, without 
considering what is just in the distribution of benefits, or 
" dispensing justice." But we are not prepared to as- 
sume that government is an agency for the equal distribu- 
tion of benefits; or that, if it is to undertake this task, 
it must, as would be necessary, take cognizance of the 
circumstances of every subject, in order to establish a 
correspondence in the apportionment of benefits and bur- 
dens. All that can be conceded is that it would be de- 
sirable, if practicable, to consider the chief ends for which 
taxes are expended, while we are examining the methods 
of taxation, and that this may be done to some extent. 
Hardly anyone would assert that there is, for example, 
any known method of determining the proportionate bene- 
fit, to a citizen of an interior state, of the building of a 
man-of-war, or of a public edifice a thousand miles away, 
or of the construction of a canal at Panama, or of pro- 
tective duties generally; and it is impossible to estimate 
the gain to a childless man of free public schools. Such 
inquiries, however complicated, are of course legitimate; 
but to attempt them here would expand this essay into a 
treatise on government in general, and would render hope- 
less the attainment of the specific end proposed. 

This point is of such importance as to make further 



THE THREE METHODS 19 

illustration desirable, and, although it will involve some 
repetition in the sequel, we shall take it from Mill's criti- 
cism of the doctrine that taxation should vary with the 
amount of protection afforded by government. He asserts 
that government does not exist solely for the protection 
of persons and property; and he also denies that to be 
protected in the ownership of ten times as much property 
is to be ten times as much protected. He concludes with 
this proposition : " If there were any justice in the theory 
of justice now under consideration, those who are least 
capable of helping or defending themselves, being those 
to whom the protection of government is the most indis- 
pensable, ought to pay the greatest share of the price ; the 
reverse of the true idea of distributive justice, which con- 
sists not in imitating but in redressing the inequalities 
and wrongs of nature." 

Many persons, however, would not accept this definition 
of distributive justice, which they regard as limited to 
redressing the inequalities and wrongs created by human 
institutions. They consider that the advantages of strength 
— physical, intellectual, and moral — cannot be, and 
should not be, conferred on weakness. They regard it 
as unjust to exempt lazy and vicious men from the con- 
sequences of their acts, and doubt if justice requires that 
the weak should pay nothing for the protection which is 
provided by the strong. They dread the results of offer- 
ing a premium to feebleness and incapacity, and thereby 
hampering the development of superior natural endow- 
ments. In fact, they would hold it decidedly advantage- 
ous, politically, for every citizen to contribute, and to 
know that he contributes, to the support of the govern- 
ment. Some persons would even go so far as to maintain 



20 THE METHODS OF TAXATION 

that if this knowledge were brought home to the members 
of the inferior classes of society, they might effectively 
insist on such reforms in government as would come near 
to reduce the price of protection to an insignificant figure. 
These opinions are not without plausibility; but we no- 
tice them here, not to take part in the controversy, but 
merely to indicate the complications avoided by exclud- 
ing from this inquiry such contentious matter as does not 
positively demand consideration. 

When we examine the system of laws under which we 
live, and in harmony with which the constitutions of our 
bodies politic have been framed, we find certain princi- 
ples, or rules of conduct, so thoroughly imbedded in this 
jurisprudence as to give it its most distinctive features; 
and we also find these features commanding the approval 
of the most enlightened observers in all countries. These 
rules could not have attained their position, or retained 
it when attained, had they not been recognized as just 
by those who have only to obey the laws as well as by 
those who make them. They pervade the morality of 
common life, and are universally appealed to as axioms 
of justice. It seems reasonable, therefore, to regard those 
rules of justice which men practically assume in their 
daily conduct, as having superior validity to those which 
are disputed, and as presumptively controlling in the 
matter of taxation. Hence the claim that any particular 
measure or any particular method is required by justice 
must be tested by these rules ; and, unless very substantial 
reasons can be given why this test should not be conclu- 
sive, such claims as cannot endure it must be rejected. 

In ascertaining these principles two courses of pro- 
cedure are open to us. We may examine the current 



THE THREE METHODS 21 

maxims of morality in the light afforded by the treatises 
on jurisprudence, the decisions of courts of justice, the 
bills of rights, and the constitutions of bodies politic ; and, 
selecting such principles as we find common to all these 
sources, apply them to the muthods of taxation. Or we 
may begin by testing the assumptions of the methods of 
taxation, by examining and comparing the arguments used 
in their support, and the criticisms to which they have 
been subjected. This examination will disclose appeals, 
implicit or avowed, to the rules of justice of which we are 
in search, and which may be verified by reference to the 
sources enumerated above. The former course would be 
the more scientific, were our aim to develop a system of 
jurisprudence to which taxation should be made to con- 
form. The latter course seems more appropriate, when 
the aim is to test methods of taxation by accepted stand- 
ards of justice; and as it has the further advantage of 
corresponding with the course naturally adopted by any- 
one who proposes to inquire into these methods, we may 
give it the preference. Adopting it, we find ourselves at 
once confronted with the problems arising from the right 
of property; for the first two methods appear to involve 
certain assumptions concerning the distribution of wealth, 
on which we cannot pass without considering what the 
ownership of wealth involves. We are thus led to proceed, 
somewhat informally, to an examination of the nature 
of property, and the limitations of it, if any, that are 
justly demanded in our society. 



CHAPTER II 

NATURE AND LIMITATIONS OF PROPERTY 

At first thought, perhaps, most men would to-day admit, 
as has been generally admitted in the past, that Adam 
Smith's leading maxim embodies the most simple and ob- 
vious method of attaining justice in taxation. The anal- 
ogy of the contribution of the tenants of a great estate is 
very effectively employed, for such a method of contribu- 
tion is recognized as just, both in business and in law. 
It is true that we are not now familiar with great estates 
parcelled out among tenants ; but nothing is more common 
than co-tenancy as partners and stockholders, and in such 
affairs no other method of apportioning expense than that 
of contribution in proportion to interest, or revenue, ap- 
pears ever to be thought of as just. Even the most radical 
reformer would reject as visionary a proposal that the 
shares of the poorer owners of a railroad should be ex- 
empted from their proportionate part of the operating 
expenses, or that the dividends of the holders of many 
shares should be at a less rate than that paid to the holders 
of a few. 

But, if we examine the analogy more carefully, we find 
that it is imperfect; and imperfect at the critical point. 
For the associations in which men engage for business 
purposes are all formed by deliberate agreement, and these 
agreements always provide, or at least assume, that the 
necessary disbursements shall be made from funds con- 
tributed by the participants in proportion to their respec- 



LIMITATIONS OF PROPERTY 23 

tive interests. This method of contribution, therefore, is 
unquestioned, because by the very act of agreement it is 
explicitly recognized as just. No one denies the justice 
of holding men to such promises, and it is immaterial 
whether this method would be regarded as just or not, 
had it not been adopted; although, no doubt, the fact 
that it has been universally adopted indicates that it is 
not regarded as unjust. 

The members of that community or association which 
we call the state have entered into no such agreement for 
contribution. Many writers have found it convenient for 
their theories to assume that states w r ere at some remote 
period formed by agreements or compacts between all their 
members ; but no one now claims that there is any historical 
basis for this assumption. Nor can it be maintained with- 
out question that our remote ancestors had any authority 
to enter into agreements binding their posterity, even if 
they bound themselves. Nor, if this were conceded, would 
it be possible to show that the method of contribution in 
proportion to revenue was implied in any of the social 
compacts which have been attributed to mankind. 

Furthermore, it is urged with much force, justice re- 
quires that many of the methods and institutions defended 
by the fiction of an ancestral compact should be changed ; 
and it does not seem possible to deny this, unless we are 
prepared to maintain that every change is unjust. No 
one, however, would say that justice forbids living men 
to modify the customs established by those long dead, and 
even if we found the method of proportionate contribution 
imbedded in our law, we need not infer that it is now a 
just method. We cannot, therefore, regard its justice as 
proved by the analogy drawn from a joint-stock corpora- 



24 THE METHODS OF TAXATION 

tion or co-tenancy in a great estate ; nor does it command 
such universal assent as to enable us to adopt it as self- 
evident. The most that can be said is that if the present 
institutions cause wealth to be distributed justly, or even 
with a reasonable approach to justice, the burdens of 
taxation may with as much justice be correspondingly 
distributed. 

But hardly any one maintains that the present distribu- 
tion of wealth is ideally just ; nor is it easy to imagine a 
definition of justice that would be satisfied by existing 
conditions. The expression of discontent with these con- 
ditions is common; it is frequently earnest and even vio- 
lent. The gravamen of the complaint is the great in- 
equality in the possessions of individual owners; from 
which it appears that justice, in the opinion of the dis- 
contented, means a certain equality in the size of estates. 
!Now, however vague the concept, the word " equality " is 
fundamental in our constitutions. The proposition that 
all men are created equal, and have equal rights to life, 
liberty, and the pursuit of happiness, was explicitly 
enounced when our government was established, and has 
never been formally repudiated. While this proposition 
is hardly equivalent to the assertion that every one should 
justly own the same quantity of wealth, it is declared 
to mean that every one should have the same opportunity 
to acquire wealth — which will be found usually to mean 
opportunity to acquire the same amount of wealth. In 
fact, it is urged, the right of property, either in itself or 
by its excessive enlargement, precludes equality of oppor- 
tunity in the pursuit of happiness, of liberty, even of life 
itself. Nearly the whole of the surface of the earth is 
owned by a comparatively small number of individuals, 



LIMITATIONS OF PROPERTY 25 

while most material things are likewise in their possession. 
The right to live has little value without the means of 
living, nor is the right to pursue happiness of practical 
use to those who cannot secure the material conditions on 
which happiness depends. The complaint has been for- 
mulated a thousand times, but never more clearly than by 
Louis Blanc, half a century ago, when he declared that the 
only right of the poor man, the right to work, amounts to 
little more than a permission to do so if he can find any 
one to employ him. 1 

This view of property is undoubtedly impressive when 
it is first presented, and it is only when we reflect on the 
enormously increased opportunities for work which civi- 
lization has brought, that we see that it does not corre- 
spond with actual conditions. There is, indeed, nothing 
modern in such complaints; they appear in the records 
of the " dawn of history." There is no reason to suppose 
that they will not be heard till the end of time, for we 
can neither conceive an equal distribution of goods as 
actually carried out, nor imagine how it could be main- 

1 f'AU around him he finds the soil preoccupied. Can he cultivate 
the earth for himself? No; for the right of the first occupant has be- 
come a right of property. Can he gather the fruits which the hand of 
God ripens on the path of man? No; for, like the soil, the fruits have 
been appropriated. Can he hunt or fish? No; for that is a right which 
is dependent upon the government. Can he draw water from a spring 
enclosed in a field ? No ; for the proprietor of a field is, in virtue of his 
right to the field, proprietor of the fountain. Can he, dying of hunger 
and thirst, stretch out his hands for the charity of his fellow-creatures? 
No; for there are laws against begging. Can he, exhausted by fatigue 
and without a refuge, lie down to sleep upon a pavement of the streets? 
No; for there are laws against vagabondage. . . . What, then, can the 
unhappy man do? He will say, 'I have hands to work with, I have in- 
telligence, I have youth, I have strength; take all this, and in return 
give me a morsel of bread/ This is what the working men do say. But 
even here the poor man may be answered, ' I have no work to give you.' 
What is he to do then?" 



26 THE METHODS OF TAXATION 

tained were it ever effected. 1 We must assume that there 
will always be honest, industrious, and prudent men, as 
well as those who are vicious, indolent, and improvident; 
and it is quite certain that the latter class will always 
complain that their lack of comfort is due to the unjust 
institutions of society. We cannot give hearing to every 
one who calls on the name of justice, merely because of 
that invocation; for the authors of the most flagrantly 
dishonest schemes insist that they are just. 

Nor can it be admitted that complaints of the unequal 
distribution of wealth are now so reasonable as they have 
often been in the past. However gross the inequalities, 
the common people are, on the whole, raised much above 
the miserable level of their forefathers, and extreme pov- 
erty is now usually connected with moral delinquency. 
The claim that the institution of property is intrinsic- 
ally unjust and must be abolished, or that justice de- 
mands the equal distribution of goods, does not com- 
mand serious attention. Property is now so generally 
diffused as to make the number of those who will listen 
attentively to such arguments comparatively insignifi- 
cant; and the tendency to such diffusion is apparently 
growing. 

The fact that universal suffrage has prevailed for sev- 
eral generations in the wealthier states of our union is 
presumptive evidence that the right of property is not 
commonly regarded as unjust. Macaulay's impressive 
warning was written half a century ago ; but we seem to 

1 f Were the landlords all hanged and their estates given to the poor, 
we should be (economically) much happier perhaps for the space of 
thirty years. But the population would be doubled then; and again 
the hunger of the unthrifty would burn the granary of the industrious." 
T. Caelyle, Life, II, p. 74. 



LIMITATIONS OF PROPERTY 27 

be even farther from the predicted catastrophe than we 
were then. His reasoning, with that of other sagacious 
observers of our great experiment, was sound enough ; but 
their premises have not been substantiated. It will be 
worth while to review these premises, in order to ascertain 
what opinions concerning justice they attribute to man- 
kind, and whether there is reason to expect such opinions 
to prevail hereafter. Such a review discloses the appre- 
hension, amounting in many instances to an assumption, 
that if the suffrage were universal the poor would control 
the government and use it to confiscate the property of 
the rich. The case was well stated by Webster, in his 
Plymouth oration, delivered in 1820. 

" The freest government," he declared, " if it could exist, 
would not be long acceptable, if the tendency of the laws 
were to create a rapid accumulation of property in few 
hands, and to render the great mass of the population 
dependent and penniless. . . . Universal suffrage, for ex- 
ample, could not long exist in a community where there 
was great inequality of property. ... In the nature of 
things, those who have not property and see their neigh- 
bors possessing much more than they think them to need, 
cannot be favorable to laws made for the protection of 
property. When this class becomes numerous it grows 
clamorous. It looks on property as its prey and plunder, 
and is naturally ready, at all times, for violence and revo- 
lution. . . . The true principle of a free and popular 
government would seem to be, so to construct it as to 
give to all, or at least to a very great majority, an interest 
in its preservation ; to found it, as other things are founded, 
on men's interest." 

The premise or assumption, it seems, of those who were 



28 THE METHODS OF TAXATION 

alarmed at the prospective consequences of universal suf- 
frage, was the existence of a majority, or a very large 
minority, of citizens without property. But, in fact, Web- 
ster's condition has been complied with. In our large 
cities, it is true, the great majority own no real property ; 
but through their deposits in savings banks and insurance 
companies of various kinds, as well as through direct 
ownership of personalty, they are substantially, and to a 
large extent consciously, interested in the preservation 
of property. Even those who are entirely dependent on 
their wages are not altogether unaware that wages might 
cease if property were overthrown, and are to that extent 
intelligently interested in maintaining it; it is, in fact, 
" founded on men's interest." If the inequalities of 
wealth cannot be removed without destroying this insti- 
tution, the rich seem to have no present need to fear. We 
shall not, as the extreme communists desire, abolish both, 
but preserve both. 

Still, we are evidently not confined to this alternative. 
Dissatisfaction with extreme inequalities of property is 
not the same thing as dissatisfaction with property itself. 
The former feeling not only prevails among the ignorant 
poor, but also permeates the educated classes, and is not 
unknown even among the rich. Without conceding the 
claims supported under the names of communism, or col- 
lectivism, or socialism, we cannot ignore the existence of 
a body of doctrine of this tendency, elaborated by men of 
ability, and by no means without the use of rational 
methods. The conclusion seems unavoidable that some 
modifications of the right of property are universally, or 
at least with some approach to unanimity, admitted to be 
ideally just, even if not practically attainable. To under- 



LIMITATIONS OF PROPERTY 29 

stand the present state of public opinion it seems neces- 
sary to review the arguments commonly employed in the 
past to justify this right, and to test their validity ac- 
cording to the standards of justice now recognized. We 
must know something of the origin and nature of property 
before we can answer the question how it can be altered 
without wrong. 

Every attempt at such alteration, it might almost be 
said, has been strenuously and even violently opposed, on 
the ground that property is something sacred. The con- 
notation of this term is extremely vague ; but as commonly 
used it seems to imply that rights of property are unal- 
terable without the consent of their possessors. We know, 
however, as a matter of fact that alterations have been 
incessantly made in the past; and, as we have observed, 
no one contends that such a continuous process has been 
throughout unjust. There seem, indeed, to be no rights 
that are in any strict sense unalienable; nor do we at- 
tain any additional sanction by substituting the term 
"natural." It is true that until a comparatively recent 
period the doctrine of " natural rights " was much relied 
on by the philosophers who undertook to explain the in- 
stitution of property. Modern criticism, however, has 
made it evident that our knowledge is not really advanced 
by appealing to this doctrine. In fact the word " natural " 
is so ambiguous as to aggravate, and even to arouse, con- 
troversies over a subject intrinsically contentious and 
obscure. 

In common speech any right seems to be called natural 
when it is universally recognized and long established, and 
is therefore regarded as normal in contrast with what is 
exceptional. But the term is also applied to such rights 



30 THE METHODS OF TAXATION 

as are supposed to have existed in the primitive state of 
man, as well as to those which would exist in an ideal 
state of society. In the former view, the existence of a 
right proves its justice ; hence the " sacredness " of vested 
rights, and the doctrine crudely expressed in the maxim 
" Whatever is, is right." But in the latter view the jus- 
tice of an established or vested right is to be determined 
not by the fact of its existence, but by its conformity 
to an ideal, whether that ideal be referred to the past 
or to the future. The distinction is clearly stated by 
Sidgwick : 

" For, from one point of view, we are disposed to think 
that the customary distribution of rights, goods, and privi- 
leges, as well as burdens and pains, is natural and just, 
and that this ought to be maintained by law, as it usually 
is; while from another point of view, we seem to recog- 
nize an ideal system of rules of distribution which ought 
to exist, but perhaps have never yet existed, and we con- 
sider laws to be just in proportion as they conform to this 
ideal." 1 

The two views are obviously divergent; and the result- 
ing ambiguity of the term " natural " is so confirmed as 
to make it desirable to limit its use. When it is necessary 
to employ it, it seems better, on account of the great in- 
definiteness of the ideal sense, to call that "natural" 

1 "It is characteristic of an unprogressive society that in it these two 
points of view are indistinguishable ; the Jural Ideal absolutely coincides 
with the Customary, and social perfection is imagined to consist in the 
perfect observance of a traditional system of rules." Sidgwick, Methods 
of Ethics, Book III, Chap. V, p. 2. Compare Maine's assertion "that 
much the greatest part of mankind has never shown a particle of desire 
that its civil institutions should be improved, since the moment when 
external completeness was first given to them by their embodiment in 
some permanent record." 



LIMITATIONS OF PROPERTY 31 

which has been so long established as to have become 
customary and legal. But the fact that we speak of bad 
customs and unjust laws proves that what we properly call 
a natural right does not necessarily commend itself to our 
consciences, although we may not perceive how it can be 
rightfully altered. For no change in the law of property 
can be made without affecting unfavorably the condition 
of some members of the community, and these persons, 
if they have been guilty of no offense in acquiring their 
property, may reasonably complain of injustice when they 
are deprived of it. The fact that the condition of other 
persons is improved by this change in the law has, strictly 
speaking, nothing to do with relieving this injustice ; for, 
if those who suffer have done no wrong to those who are 
benefited, they cannot be justly charged with the cost of 
this benefit, and to compel them to bear it we call an 
injury. 

Hence it seems that, while our consciences would of 
course approve an ideally perfect system of distribution, 
could it be revealed to us, they would revolt at the conse- 
quences of any attempt to realize it in practice. And this 
raises the question whether a system that is unattainable 
is properly to be regarded as an ideal system; for while 
a young man may be indirectly benefited by following 
Emerson's advice, " Hitch your wagon to a star," legisla- 
lation on this plan would probably be disastrous. Progress 
is retarded by wasting energy. One who tries to lift a 
weight beyond his strength exhausts himself without ac- 
complishing anything toward his purpose. In practical 
affairs, and especially in political affairs, attainability must 
ordinarily be characteristic of any ideal. Absolute justice 
is not satisfied by partial application. To apply an ideal 



32 THE METHODS OF TAXATION 

standard only in certain cases, or to a limited extent, may 
aggravate injustice rather than remove it. 1 

While this antinomy must evidently be disclosed in a 
progressive community, the fact that progress seems normal 
in modern states shows that in practice the difficulty is 
overcome or ignored. Solviter ambulando. Legislation 
exhibits a continuous series of compromises between the 
forces of conservatism and progress, and in these com- 
promises we shall expect to find some common qualities or 
principles. The conservative is compelled to recognize 
some other ideal than the mere maintenance of present 
conditions; the reformer must accept something short of 
ideal perfection. E*o doubt extreme measures are often 
adopted ; but this implies that they are regarded as unjust 
by a large part of the community, and are therefore not 
apt to be permanent. They work with so much friction 
as to defeat their own object, and such equilibrium as they 
produce is dangerously unstable. "No ideal can be real- 
ized in a house divided against itself; justice cannot 
prevail in the midst of discord. It is true that no com- 
promise, even if called successful, can seem to either party 
to conform perfectly to justice ; but it may be accepted by 
both as the closest possible approximation thereto, because 
no more will be yielded by one side, no less insisted on by 
the other. 



1 Governments, for example, pay some of their employees higher 
wages than are paid by private persons, with the avowed purpose of 
establishing an ideal rate of compensation which other employers will 
be led to imitate. But as the industrial operations of governments are 
usually carried on without regard to resulting deficiencies, while private 
employers must make a profit or be ruined, and as the revenue of gov- 
ernment is subtracted from that" of private employers or their employees, 
the policy tends to defeat its ostensible purpose and to intensify the in- 
justice which it professes to remove. 



LIMITATIONS OF PROPERTY 33 

Now we find this common quality of compromises, or 
what we may call the regulative principle of progress, 
explicitly recognized in our jurisprudence, and formally 
stated in our constitutions. Private property, it is de- 
clared, shall not be taken for public use without just com- 
pensation, which is generally understood to mean, and 
sometimes defined as, a pecuniary equivalent. This prin- 
ciple appears on examination to be consistent with the 
doctrine that men should have equal opportunities to ac- 
quire wealth. No doubt the condemnation of property 
for public use results temporarily in giving advantages 
to a small number of persons at the expense of the rest. 
But this gain may be, what it is usually asserted to be, 
only the removal of obstacles which have hindered these 
persons from enjoying that equality of opportunity to 
which they are justly entitled; and it is supposed to 
result in a permanent gain of this kind to the public at 
large. When a new highway is opened it must be of 
especial convenience to a few; but they may have previ- 
ously contributed to the cost of other highways from 
which they have derived no advantage, and eventually the 
new road should facilitate general commerce. No doubt 
the compensation awarded is frequently imperfect ; money 
may not console a man for the loss of an ancestral home 
by condemnation proceedings, any more than payment by 
an insurance company will reconcile him to its destruction 
by fire. But as men build with the knowledge that fire 
may destroy the work of their hands, so they acquire prop- 
erty with notice that their title is, as it always has been, 
subject to the right of eminent domain. 

This principle seems to be generally accepted as almost 
self-evident, and its history shows that it is permanently 

3 



34 THE METHODS OF TAXATION 

satisfactory to mankind on rational grounds. We might 
therefore recognize it as fundamentally just, were it not 
for the objection, often very strenuously urged, that when 
property has been unjustly acquired, the public may justly 
take it without compensation. Now this evidently cannot 
refer to the illegal acquisition of wealth ; for what is ille- 
gally acquired does not become the property of the pos- 
sessor, but belongs to the individual from whom it was 
taken, not to the public. It follows that the unjust ac- 
quisition must be a legal acquisition, and the contention 
is therefore that laws permitting the acquisition of some 
forms of property are unjust, and must be overthrown or 
disregarded without compensating those who are thereby 
deprived of their possessions. Thus it is maintained that 
laws recognizing property in human beings were justly 
abolished in this country without any pretense of compen- 
sation to the slaveholders of the Southern States. 

The emancipation of the slaves, however, was an act of 
war; and we find that principles of justice have very 
slight application when bodies of men are struggling to 
destroy each other's lives and property. Before war ac- 
tually broke out, it must be remembered, the slave owners 
might have received compensation had they been willing 
to abandon the institution of slavery; and, under the cir- 
cumstances, their refusal was practically a waiver of their 
constitutional right. But whether we can construct an 
ethical code by which the conduct of men engaged in mutual 
slaughter is regulated, or not, such a code would evidently 
be useless as a guide to men living together as friends in 
a peaceful society. Inter arma silent leges; but under 
normal conditions laws must be altered by law and not 
by violence. And, as we have seen, a method of altera- 



LIMITATIONS OF PROPERTY 35 

tion has been devised under which the inevitable injury 
caused by any alteration is reduced to a minimum. 

This conclusion is not affected by our recognizing the 
right, or even the necessity, of revolution. The conscience 
of the individual man is for him the supreme authority, 
and if it forbid him to obey a law, he may rightfully re- 
fuse obedience. Thus many conscientious persons declined 
to obey the constitutional mandate to return fugitive slaves 
to their owners, and sometimes actively resisted it. They 
were in effect rebels; they apparently initiated the revo- 
lution which finally extinguished slavery, and they may 
be thought to have acted justly, because, it is commonly 
said, the event justified them. But even in the case of 
perhaps the most beneficent revolution that has ever taken 
place, we can justify violence only on the ground that 
peaceful methods were unavailable. The end being to 
abolish property in human beings, the normal course of 
reform would have been to employ the means provided by 
the constitution; and, had not the slave-holders resorted 
to violence, we may infer, from the example of other move- 
ments of emancipation, that this course would have event- 
ually been taken. In this view the revolution was not 
the act of the antislavery party, but of the pro-slavery 
party, and it is irrelevant to inquire whether the opponents 
of slavery were justified in their course. 

Even in the case of what are called successful revolu- 
tions, we must always ask if the beneficent results could 
not have been better obtained by peaceful methods; and 
if it clearly appears that they could have been, we do not 
consider the revolution justified. Unsuccessful revolutions, 
of course, are even less justifiable; although we must 
admit that the blood of the martyrs may be the seed of 



36 THE METHODS OF TAXATION 

the church, and beware of considering temporary results 
alone. The scope of this inquiry, however, does not re- 
quire us to decide on the responsibility of individuals, but 
on the justice of organized and violent resistance to law. 
But this is civil war ; it means that rulers will try to kill 
their subjects, and subjects their rulers. It is perhaps 
conceivable that human happiness is promoted by opera- 
tions of this kind, at least when we think of some cruel 
despotisms; but arguments in support of this conclusion 
generally ignore what might have happened had suitable 
measures been employed to preserve peace. All war neces- 
sarily inflicts terrible suffering on many human beings 
guiltless of moral delinquency; but civil war is so pecu- 
liarly cruel and demoralizing as to make it difficult to 
believe that the existence of any right of property in 
material things can cause more misery than such a remedy. 
Rights of property existed in France that were inde- 
fensible on rational grounds ; but it has been demonstrated 
that the Revolution was caused, not by this injustice, but 
by the intolerable burden of a mass of taxes so contrived 
as to make productive industry impossible. 

Still, it may be contended, the provision for compensa- 
tion may be revoked by constitutional methods. It seems 
to be supported by common sense, because it has the pres- 
tige given by being expressed in the constitution; but if 
it be clearly seen that it perpetuates gross abuses, com- 
mon sense may reject it. And if it should prove that 
much the greater number of the people had taken this 
view, the standard that we have adopted would require 
us to admit its justice. But we find no evidence leading 
us to believe that men would generally say that private 
property might be taken by government without compen- 



LIMITATIONS OF PROPERTY 37 

sation. This would be to abolish property as a legal 
institution, which we have seen reason to think will not 
take place. No doubt great numbers of men have sub- 
mitted to tyrants; but this does not prove that they 
thought it just that they should be deprived of their pos- 
sessions by their government. Nor does the case seem 
to be altered if we say that men may be deprived, not of 
all, but of certain kinds of legally acquired property with- 
out compensation. For this is not to say that the law 
may not declare that after a given time a certain kind 
of property shall cease to be recognized; this may be 
unwise, but as it applies to all members of the community 
we do not call it unjust. It is to say that certain indi- 
viduals who have acquired wealth on the faith of the as- 
surance given by the law that such wealth shall be pro- 
tected, and who have violated no law, shall find that 
assurance withdrawn and that protection withheld. The 
codes, both of law and of ethics, condemn such proceed- 
ings as unjust for reasons which are fundamental in our 
civilization. 

These reasons appear to depend on two leading prin- 
ciples : first, that men may justly own the product of their 
labor, and second, that they may be justly compelled to 
keep their promises. The two principles are clearly dis- 
tinguishable, but in describing their application writers 
have so often confounded them as to make it difficult to 
preserve the distinction; and in this way the legal right 
conferred by prescription has come to be asserted as also 
a fundamental principle of justice. The true origin of 
these principles will be disclosed if we continue our ex- 
amination of the methods employed by philosophers in 
explaining and justifying the right of property. These 



38 THE METHODS OF TAXATION 

methods will be found to have changed somewhat as civil- 
ization has progressed, but discarding the mutable ele- 
ments, we may hope to obtain a permanent residuum of 
truth. 

The earlier writers on property, who were prone to 
appeal to " nature," usually regarded priority of occu- 
pation as conferring or constituting, a natural right; and 
it has certainly played an important part in denning the 
territorial jurisdictions of several of the more powerful 
states. The doctrine was apparently first elaborated by the 
Roman publicists for the purpose of fortifying the defec- 
tive title by which the nobles held possession of the public 
lands; but it came to have a very wide application. 
Grotius lays it down that prior occupation of the soil, 
" by the tacit consent of mankind," gave a right to its 
use, and as the use was prolonged, to its substance. The 
violent disputes among the European powers over discov- 
eries of whole continents lying outside of Christendom 
show that the consent of mankind was by no means a 
matter of course; and the application of the principle 
was palpably absurd. It may confer, as Maine says, enor- 
mous advantages merely as the consequence of a piece of 
good luck, and its connection with the idea of justice is 
altogether adventitious. 1 

1 "In applying to the discovery of new countries the same principles 
which the Romans had applied to the finding of a jewel, the Publicists 
forced into their service a doctrine altogether unequal to the task ex- 
pected from it. Elevated into extreme importance by the discoveries of 
the great navigators of the 15th and 16th centuries, it raised more dis- 
putes than it solved. . . . Moreover, the principle itself, conferring as 
it did such enormous advantages as the consequence of a piece of good 
luck, was instinctively mutinied against by some of the most adven- 
turous nations in Europe, the Dutch, the English, and the Portuguese. 
. . . Bentham was so struck with the confusion attending the applica- 
tion of the legal principle that he went out of his way to eulogize the 



LIMITATIONS OF PROPERTY 39 

Much learning and ingenuity have been expended both 
in attacking and defending this principle; but it origi- 
nally amounted only to an expression of a rule of expe- 
diency. Occupation gave title not because of any preva- 
lent conception of natural justice, but because men's 
quarrels had to be terminated. The earliest tribunals were 
not constituted to apply laws but to preserve order. The 
easiest, and in that sense the most natural, course for a 
judge to follow, when several persons appeared before 
him claiming title to the same thing, was to recognize the 
one that had possession as the owner ; and the maxim Beati 
Possidentes is the ultimate legal basis of the tenure of 
the earth by its occupants. Like other animals, men have 
appetites that must be gratified with the fruits which the 
earth affords. They would starve without them, and they 
appropriate them in order to satisfy their hunger. Hav- 
ing seized them, like other animals they resist with force 
attempts to deprive them of their possessions ; and it was 
perhaps originally the chief function of civil government 
to prevent such interference. A law recognizing occu- 
pancy as conferring a right of property seems therefore 
of the nature of a statute of repose ; like the rules limiting 
the time within which actions may be brought, it " quiets 
title." Strictly speaking, however, it asserts nothing as 
to the justice of any title which it supports; although it 

famous Bull of Pope Alexander the Sixth, dividing the undiscovered 
countries of the world between the Spaniards and the Portuguese by a 
line drawn one hundred leagues west of the Azores ; and, grotesque as 
his praises may appear at first sight, it may be doubted whether the 
arrangement of Pope Alexander is absurder in principle than the rule 
of Public law, which gave half a continent to the monarch whose ser- 
vants had fulfilled the conditions required by Roman jurisprudence for 
the acquisition of property in a valuable object which could be covered 
by the hand." Maine, Ancient Law, Chap. VIII. 



40 THE METHODS OF TAXATION 

may imply that justice is promoted by requiring whoever 
would question such titles to overcome the presumption 
in their favor established by their mere existence. 

We must admit, therefore, that however indispensable 
the principle that occupancy gives title may be in the 
practical administration of justice, it gives too much im- 
portance to mere priority and good fortune to satisfy the 
moral sense of mankind. The accident of time cannot be 
of the essence of justice; and hence philosophers have 
usually maintained that the expenditure of labor is a 
fundamental requisite in establishing a right of property. 
Thus when they speak of occupancy as conferring title, 
they assume that labor is added. As Locke says, the labor 
of a man's body and the work of his hands are properly 
his, and " whatsoever then he removes out of the state that 
nature hath provided and left it in, he hath mixed his 
labor with and joined to it something that is his own, and 
thereby makes it his property." Evidently in these ob- 
servations Locke had in mind the case of a savage who 
had plucked fruit from a tree, or taken fish from a stream, 
or even planted a piece of ground for the purpose of 
providing himself with food. The thing possessed and 
the labor expended on it are indispensable to the subsist- 
ence of the owner, and the recognition of property in this 
form seems to have been a fundamental condition of any 
advance in civilization, as without it perpetual war would 
prevail. It seems necessary also to extend it to the in- 
struments required in procuring subsistence. ISTo one 
would be at the pains to provide himself with such imple- 
ments if he could have no security in the use of them; 
" if, so soon as he walked out of his tent, or pulled off his 
garment, the next stranger who came by would have a 



LIMITATIONS OF PROPERTY 41 

right to inhabit the one and to wear the other." To this 
extent, at least, property is universally recognized, and 
we may adopt as fundamental the principle that he who 
expends labor on anything unappropriated that is neces- 
sary for his existence is thereby justified in its exclusive 
possession. 

To this principle the doctrine that justice demands that 
all men shall have equal opportunity to acquire wealth is 
necessarily subordinate. For the material things consti- 
tuting wealth are limited in quantity, while no limit can 
be assigned to the possible number of men except the 
deficiency of food. It has often happened in the past, 
and sometimes happens to-day, that the quantity of food 
procurable by a community has not been enough for the 
subsistence of the whole population ; and, while it is hard 
to reconcile such conditions with Divine justice, we do 
not regard it as unjust, according to human standards, that 
those who have provided by their labor so much food as 
will barely suffice to keep them alive should use it for 
themselves, even if their neighbors are starving. For, as 
some must perish, it seems unjust that it should be those 
who have labored and been provident, rather than those 
who have not. The parable of the wise and foolish vir- 
gins has many practical applications. So when a ship- 
wreck occurs the capacity of the life-boats is often found 
insufficient. The boats will sink if all the passengers 
crowd into them ; and probably no one would contend that 
justice requires all to be drowned because all cannot be 



These illustrations, however, show that as property is 
regarded as just because it is necessary to support life, 
so the justice of the ownership of more than is necessary 



42 THE METHODS OF TAXATION 

must be otherwise established. We cannot admit that 
occupancy and the expenditure of labor in providing food 
to a greater extent than is required to support life give 
a self -evidently valid title to the surplus; at least while 
other men equally willing to labor are starving. Failure 
to notice this qualification has led many writers to state 
the right of property in the results of labor too absolutely. 
Thus Mill gives the following definition : " The institu- 
tion of property, when limited to its essential elements, 
consists in the recognition in each person, of a right to 
the exclusive disposal of what he or she have produced 
by their own exertions, or received either by gift or by 
fair agreement, without force or fraud, from those who 
produced it. The foundation of the whole is the right 
of producers to what they themselves have produced." 
He adds that bequest is one of the attributes of property; 
" the ownership of a thing cannot be looked upon as com- 
plete without the power of bestowing it, at death or during 
life, at the owner's pleasure." He distinguishes, however, 
the capacity of making bequests from that of taking them, 
holding it no interference with the right of property to 
limit the latter capacity. 

The same doctrine was set forth by the late Henry 
George in his book, " Progress and Poverty " ; a work 
which deserves notice here because of the large number of 
persons who seem to have been favorably impressed with 
the method of taxation recommended by, the author. He 
maintains, after Locke, that " as a man belongs to himself, 
so his labor when put in concrete form belongs to him. 
And for this reason that which a man makes or produces 
is his own, as against all the world — to enjoy, or to 
destroy, to use, to exchange, or to give." The right of 



LIMITATIONS OF PROPERTY 43 

unlimited transfer is especially emphasized : " Thus there 
is to everything produced by human exertion a clear and 
undisputable title to exclusive possession and enjoyment, 
which is perfectly consistent with justice, as it descends 
from the original producer, in whom it vested by natural 
law." 

It is obvious that these statements involve material ex- 
tensions of the original doctrine. " The law of nature 
and reason," as Blackstone says, may entitle him who 
works to the fruits of his labor, so far as the satisfaction 
of his wants is concerned. But it is not apparent, as we 
have pointed out, that a man becomes entitled to an un- 
limited quantity of material things by virtue of labor ex- 
pended on them, or that a title originally just continues 
with unimpaired validity for all time. For the quantity 
of available matter is limited; and, as population in- 
creases, many substances become relatively scarce. When 
gold was first discovered in California, Mr. George informs 
us, it was obtained by what was called " placer mining," 
or washing the grains of metal out of the gravel in which 
they were imbedded. The miners in each district fixed 
the amount of ground that an individual could take, and 
the device is said by this writer to have secured substantial 
justice. " One man might strike an enormously rich de- 
posit, and others might vainly prospect for months and 
years, but all had an equal chance." A new comer, how- 
ever, might find all the available ground preoccupied, 
and that he had no chance at all; while after a time 
all the accessible gold would have passed into private 
ownership. Under such circumstances good luck and 
priority, rather than labor, seem to be the foundation of 
property. 



44 THE METHODS OF TAXATION 

Substances of unstable composition, perishable articles, 
as they are called, may be appropriated without question 
because otherwise they will be useless, but durable mate- 
rials are affected with the claims of future generations. 
Of some of these materials the quantity may be practically 
unlimited. Population will perhaps never become so dense 
as to make it difficult to obtain an abundance of ordinary 
stone or clay. The supply of certain things, however, is 
proved to be relatively deficient by the value which they 
attain. That they have any value proves some degree of 
scarcity; and, as this scarcity becomes more appreciable, 
the value of that portion of the substance that has passed 
into private ownership is enhanced. Under the unlimited 
right of transfer asserted in the passages above quoted this 
portion may pass into the hands of persons who did not 
exist when it was produced, and who performed no labor 
in its acquisition. The fact that labor was expended in 
the remote past by ancestors or benefactors does not of itself 
cause men to regard as just the title of the possessor of 
great wealth, toward the accumulation of which he has not 
lifted a finger. 

It is evident that neither of the writers quoted has 
sufficiently considered all that is involved in asserting an 
unlimited right of transfer. As to right of transfer by 
bequest, indeed, Mill's statements seem irreconcilable. For 
we cannot say that a man has perfect liberty in giving, 
when others have not perfect liberty in receiving. Were 
this true, we might say that to restrict the capacity to buy 
does not limit the power to sell, — a conclusion too absurd 
to deserve attention. The difficulty felt by Mill is not con- 
fined to transfers by bequest. He had in mind the acqui- 
sition of great estates by legatees without any labor on 



LIMITATIONS OF PROPERTY 45 

their part; but the same result may appear when gifts 
are made by the living. And even in the case of transfers 
for a valuable consideration, the consideration may be in- 
adequate; or, as we have seen, the value of the object 
transferred may in the course of years very greatly 
increase. 

So far as labor justifies property, therefore, the right to 
an object obtained by exchange seems to be limited to the 
same extent as the right to an object produced; that is, 
by the necessities of the proprietor. To this extent we 
may follow the older writers, and say that the right to hold 
by exchange whatever has become the subject of property 
is derived from that conferred by occupancy and labor, 
" the first occupant abandoning what he had occupied by 
allowing such person as he chose to take his place. The 
second and every later occupant being in occupation, and 
no one being concerned to question the possession except 
those who had permitted it, the law confirmed the bar- 
gain " ; and it is to this day reluctant to allow any trans- 
fer made with due formality to be disturbed. So far as 
the law is concerned, therefore, we might say that all 
titles are based on occupancy, original or derivative; and 
justice, in the legal sense, would mean little more than the 
observance of the rules governing transfers. Nor when 
we consider the frightful misery of those peoples whose 
governments fail to apply such rules, or to respect titles 
acquired in conformity to them, can we deny that there is 
some truth in this view. In such matters the experience 
of all nations shows, as Adam Smith says, that a very con- 
siderable degree of inequality is not near so great an evil 
as a small degree of uncertainty. 

The study of this experience brings to light the true 



46 THE METHODS OF TAXATION 

reason why men have always held it just that the right of 
property in things obtained by transfer should be recog- 
nized. The whole fabric of civilization rests on this right. 
No progress beyond the life of the brutes could ever have 
taken place without it. It is indispensable to what Adam 
Smith calls the division of labor, which is the source of all 
our wealth. There is, as he expressed it, in human nature 
a certain " propensity to truck, barter, and exchange one 
thing for another," which is " common to all men, and to 
be found in no other race of animals, which seem to know 
neither this nor any other species of contracts." Without 
the recognition of this species of contract, society could 
not have been organized, nor law developed; nor could 
peace have anywhere prevailed. As the life of the in- 
dividual depends on his having property in what he has 
produced, so the life of whole communities of men de- 
pends on their having property in things obtained by 
exchange. 

As Adam Smith showed with incomparable power, by 
means of such property the sum total of wealth, and there- 
fore the average wealth of every one, is enormously in- 
creased. Whatever the original source of title, nearly all 
things now owned have come into their owners' possession 
by exchange or transfer. The quantity of goods consumed 
by those who produce them is comparatively so small as to 
make it hardly an exaggeration to say that everything is 
produced in order to be exchanged. Most things, indeed, 
are exchanged many times before they are finally con- 
sumed. Services having no tangible embodiment are com- 
monly requited by some " material equivalent," as we say, 
and " value " has come to mean value in exchange. The 
advance of civilization may be measured by the removal 



LIMITATIONS OF PROPERTY 47 

of hindrances to freedom of transfer, and nearly every 
attempt to restrict it by taxation has been found to dimin- 
ish the wealth of the community rather than to increase 
the revenue of the sovereign. Modern industry could not 
be carried on without legal recognition of this right of 
free contract; it would be paralyzed were any question to 
exist as to the validity of the title to things obtained by 
barter. 

No doubt the weakness or necessity of one party to an 
exchange sometimes gives the other what we call an unfair 
advantage, even when both parties are competent to con- 
tract and no fraud or force has been employed. Indeed, 
bargains of the largest class, those in which poor men barter 
their labor, are often stigmatized as unjust, on the ground 
that laborers are compelled by their poverty to accept such 
terms as employers choose to offer. It admits of no ques- 
tion, however, that the condition of the poor has been 
bettered as liberty of contract has been legalized ; nor can 
we imagine a community where this complaint of unfair- 
ness would not be heard. For, ex vi termini, the laborer 
is not a capitalist, and the very fact that one of the 
parties to the contract of hiring possesses accumulated 
wealth, while the other does not, constitutes the supposed 
unfairness. 

But it seems clear that if wealth gives an advantage in 
this bargain, the advantage would be rather increased than 
diminished by whatever made the bargain more difficult. 
The prodigious development of the means of physical trans- 
fer, and the incessant endeavors to lessen the cost of trans- 
portation, imply the common acceptance of freedom of 
exchange as just; and in spite of numerous legal restric- 
tions, modern society may be said to be constituted on this 



48 THE METHODS OF TAXATION 

principle. 1 Hence it is argued that the apparent injustice 
of great aggregations of wealth in the hands of individual 
owners is an inevitable adjunct of progress, and that if 
they cannot be prevented without interfering with the free- 
dom of contract, less injustice will be caused by tolerating 
them than by attempting to prevent them. In this view, 
the fact that a few men acquire great wealth is a conse- 
quence of the institutions that enable the mass of the people 
to acquire wealth at all. As a matter of fact, those who 
regard great estates as an evil have generally proposed to 
regulate the disposition rather than the acquisition of 
them ; nor are men anywhere forbidden to own more than 
a prescribed quantity of wealth. 

If property in things obtained through transfer is just, 
it is evident that justice requires the recognition of title 
by prescription. The reasons for this are succinctly stated 
by Mill, 2 and need not be enlarged upon. It may be added, 

1 ^'If there is one thing which more than another public policy re- 
quires, it is that men of full age and competent understanding shall have 
the utmost liberty of contracting, and that their contracts when entered 
into freely and voluntarily shall be held sacred and shall be enforced by 
courts of justice." Jessel, M. R. 

2 The principle of individual property requires "that a title, after a 
certain period, should be given by prescription. According to the fun- 
damental idea of property, indeed, nothing ought to be treated as such, 
which has been acquired by force or fraud, or appropriated in ignorance 
of a prior title vested in some other person; but it is necessary to the 
security of the rightful possessors, that they should not be molested by 
charges of wrongful acquisition, when by the lapse of time witnesses 
must have perished or been lost sight of, and the real character of the 
transaction can no longer be cleared up. Possession which has not been 
legally questioned within a moderate number of years, ought to be, as 
by the laws of all nations it is, a complete title. Even when the acquisi- 
tion was wrongful, the dispossession, after a generation has elapsed, of 
the probably bona fide possessors, by the revival of a claim which had 
been long dormant, would generally be a greater injustice, and almost 
always a greater private and public mischief, than leaving the original 
wrong without atonement. It may seem hard that a claim, originally 
just, should be defeated by mere lapse of time ; but there is a time after 



LIMITATIONS OF PROPERTY 49 

however, that barter would become impossible were every 
new owner compelled to trace the title of whatever he 
acquired. While, strictly speaking, no title can be acquired 
or given by a thief, the law refuses in many cases to allow 
the title of one who purchases in good faith for value to 
be questioned; and the nature of large classes of personal 
property is such as to make this rule necessary. To compel 
every one who received a coin or a banknote to trace the 
title by which it has been previously held before he could 
be assured that he had a right to hold it, would be uni- 
versally regarded as the height of injustice. In such cases 
immediate title by prescription is evidently a necessity of 
human industry; and the case of land, where the law per- 
mits a superior title to be asserted against an innocent 
purchaser for value within a certain number of years, does 
not constitute an exception to the principle. For the pur- 
chase of land is usually a momentous transaction, implying 
deliberation, as well as careful scrutiny of official records, 
and there is so little room for error or deception that some 
states guarantee against all attacks the title of a purchaser 
who has observed due formalities. Where the customary 
periods of limitation prevail, few conveyancers, perhaps, 
would hesitate to say that more injustice is caused in 
practice by bringing forward titles that have been over- 
looked than would be caused by precluding them, and this 
opinion is confirmed by the very small losses incurred by 
the companies that insure titles. 

which (even looking at the individual case, and without regard to the 
general effect on the security of possessors), the balance of hardship turns 
the other way. With the injustices of men, as with the convulsions and 
disasters of nature, the longer they remain unrepaired, the greater be- 
come the obstacles to repairing them, arising from the aftergrowths 
which would have to be torn up or broken through." Mill, Pol. Ec, 
Book II, Chap. II, § 2. 

4 



50 THE METHODS OF TAXATION 

The conception of barter seems to involve also the prin- 
ciple that men should keep their promises, and that govern- 
ment may justly compel them to do so. For if there were 
no legal way of holding men to their contracts, many of 
the most important ones, which require time for their per- 
formance, would not be entered into, and the course of in- 
dustry would be interrupted by incessant quarrels over the 
most ordinary transactions. As what we call scientific 
knowledge is based on the principle of the uniformity of 
natural law, which enables us to predict the future, so in 
human affairs it seems desirable that men should be so far 
as possible enabled to rely on having their expectations 
fulfilled. Progress consists to a great extent in eliminating 
or overcoming the uncertainties of nature, and in establish- 
ing relatively permanent conditions in industry. In spite 
of our great achievements in this direction, disastrous re- 
sults from the failure of reasonable expectations are still 
common, and were no one obliged to do as he agreed the 
mischief would be incalculable. In order to avoid the 
state of private war which would otherwise prevail, all 
governments have established tribunals for the purpose of 
compelling men to perform their promises, or to pay dam- 
ages for their failure ; and this we call dispensing justice. 
Indeed, it is obvious that if justice requires equalization 
of opportunity, the application of this principle is neces- 
sary. For while rich men might be able to compel those 
with whom they dealt to keep faith, poor men would usually 
be quite helpless if the law did not help them, and we see 
that the condition of the poorer classes is extremely miser- 
able in communities where the courts fail to discharge this 
obligation. 

.While this principle of justice is as well established at 



LIMITATIONS OF PROPERTY 51 

law as it is in morals, the propensity of rulers to exercise 
despotically the authority with which they are clothed, 
manifested through the colonial governments, caused the 
insertion in the constitution of the United States of the 
provision already referred to, that no state shall pass any 
law impairing the obligation of contracts. We need not 
inquire whether or no the federal government is restrained 
by this principle, as we wish only to know if there is one 
standard of justice for rulers and another for subjects. 
The criticism which this constitutional provision has often 
received seems to indicate that some such distinction is 
believed to exist. Legislators have entered into corrupt 
and improvident contracts, and many contracts, apparently 
unobjectionable when made, prove oppressive to posterity. 
Now, when individuals make improvident contracts, their 
loss may be said to be limited by the duration of their own 
lives, even if we admit that their children may feel a 
natural disappointment. But the relation of the legisla- 
ture to coming generations differs from that of a parent 
to his offspring not only in duration but also in extent. 
The contract of the legislature, being of larger scope, may 
result in a serious impairment of that equality of oppor- 
tunity which is of the essence of justice, and may tend to 
create a permanent monopoly. These results may some- 
times become so intolerable as to make it seem a less in- 
justice to break the contract than to keep it ; they may even 
threaten revolution. Under these circumstances, as often 
happens when a contract made by individuals proves to be 
very onerous to one of them, policy may advise modifica- 
tions that strict law would not enforce. By the exercise of 
legal casuistry courts have in some cases sustained laws 
that did impair the obligation of contracts ; and they have 



52 THE METHODS OF TAXATION 

not always required due compensation to be given for prop- 
erty taken for public use. These cases, however, are on the 
whole exceptional, and the most strained decisions profess 
to comply with the principles of justice laid down in the 
constitution. 

As has been observed, in a progressive society conflict 
between vested rights and the requirements of changed 
conditions is inevitable, and there must be some principle 
upon which the conflict can be regulated. In most cases 
it seems clearly just that the public should compensate 
those whose rights of property are extinguished, even if 
the state has made no express contract establishing those 
rights. For we think it as unjust for rulers to disappoint 
the reasonable expectations of their subjects, as for other 
men to practice deceit in their dealings; and when any 
form of property has been legally recognized, it seems rea- 
sonable to assume that this recognition will continue, on 
the grounds above stated in considering property obtained 
through exchange. 1 But these grounds themselves suggest 
the limits of what it is reasonable to expect. For their 
chief element is the expediency of allowing men to con- 
tract freely, and certain kinds of property may in time be 



1 The ideally just man is he that sweareth to his own hurt and chang- 
eth not, and the standard of the law is really not much below this ideal. 
The courts have developed the doctrine of estoppel in pais, or by con- 
duct, as well as by deed and record, to a degree that commands admira- 
tion. It is worth while to quote the definition of estoppel by conduct 
given by Sir James Stephen. "When one person by anything which he 
does or says, or abstains from doing or saying, intentionally causes or 
permits another person to believe a thing to be true, and to act upon 
such belief otherwise than but for that belief he would have acted, 
neither the person first mentioned nor his representative in interest is 
allowed, in any suit or proceeding between himself and such person or 
his representative in interest, to deny the truth of that thing." Digest 
of the Law of Evidence, Art. 102. 



LIMITATIONS OF PROPERTY 53 

found to interfere with this right. When this becomes 
very apparent, it ceases to be reasonable to expect that such 
kinds of property will be permanent. Thus men were long 
ago restrained by the statutes against perpetuities from 
" forging those fetters that seem, by restricting the do- 
minion of posterity, to extend their own," and proprietary 
rights exercised through incorporations have been repeat- 
edly curtailed. Rulers chosen by the people may enter 
into contracts binding on the present generation ; but when 
they create burdens for men yet unborn, it is reasonable 
to expect that their proceedings will be eventually subject 
to revision. 

Such modifications, when made with proper caution, do 
not seem to constitute a disappointment of reasonable ex- 
pectations, and need involve no breach of good faith by 
rulers. Very few persons would be hindered from engag- 
ing vigorously in the acquisition of wealth by the appre- 
hension that the period during which they could render it 
inalienable after their death might be at any time short- 
ened by law. And moreover the practical influence that 
may be wielded by the managers of great aggregations of 
wealth in the corporate form has always constituted a 
warning that property of this kind is more exposed to 
restriction, if not actual confiscation, than that held by 
individual right; and the statutes of mortmain were pro- 
fessedly enacted because the free transfer of property was 
impeded through its accumulation by certain corporations. 
As to modern industrial corporations, especially those that 
have been authorized to exercise the right of eminent do- 
main, it has long been obvious that their rights of property 
are liable to somewhat extensive modification, and it cannot 
be said that a purchaser of shares ip these bodies is dis- 



54 THE METHODS OF TAXATION 

appointed in reasonable expectations when the burdens laid 
on them are increased in the same manner in which they 
have been increased in the past. 

In recent years, too, legislators have commonly provided, 
in granting such franchises, that the rights of property 
conferred shall be limited, and such property must be held 
to be acquired by individuals with notice of these prospec- 
tive limitations. In practice, however, it must be said, the 
courts appear to have generally annulled laws that would 
effect the actual confiscation of such property, and to have 
relieved proprietors from burdens that would deprive men 
of a reasonable return from their investments. On the 
whole it seems that the justice of the principle that reason- 
able expectations shall not be disregarded by governments 
is generally recognized. It is true that the holders of 
certain kinds of property have been sometimes heavily 
amerced ; but this has in modern times usually been when 
some emergency like war compelled the government to 
obtain revenue as it could, or when the imposition of a 
new burden has been a long time proposed, or when it is 
very gradually introduced. The common sense of mankind 
does not appear to condemn such proceedings as violating 
the good faith which justice requires governments to ob- 
serve. The maxim " caveat emptor " is notoriously ap- 
plicable on the stock exchange. He who purchases a share 
in a corporate enterprise does so with fair warning that, 
as he relieves himself of the personal care of his capital, 
he is liable to pay for this relief by suffering various 
amercements. 



CHAPTER III 

UNEARNED PROPERTY 

With some such qualifications as have been stated, 
the justice of most existing rights of property seems to be 
generally recognized. But there is one species of property 
— that in land; or, more strictly, the rent of land — 
which is declared to be of a different nature from all 
other kinds, and to be indefensible by the considerations 
that support the justice of property in general. This 
species of property, it is said, necessarily deprives men, 
both those now living and those yet to be born, of that 
equality of opportunity which justice demands. While 
property in things separated by labor from the common 
mass may be thought less absolute than is asserted by the 
exponents of these views, property in the surface of the 
earth — to which the law annexes dominion over the matter 
of the earth as far as its center, and over the surround- 
ing atmosphere upwards to infinity — should, according to 
them, be restricted, or abolished altogether. The improver 
of land, it is observed by Mill, has just title to it, but not 
the mere proprietor. The principle that product belongs 
to the producer does not apply to the raw material of the 
earth. " It is no hardship to any one to be excluded from 
what others have produced; they were not bound to pro- 
duce it for his use, and he loses nothing by not sharing in 
what otherwise would not have existed at all. But it is 
some hardship to be born into the world and to find na- 



56 THE METHODS OF TAXATION 

ture's gifts previously engrossed, and no place left for 
the new comer." 

This hardship, however, is not regarded by Mill as 
implying that it is wrong to be a landlord, and his pro- 
posed remedies do not conflict with the generally accepted 
standards of justice. They are intended to prevent the 
acquisition of an absolute right of property in land in the 
future, not to confiscate such rights as have been lawfully 
acquired in the past. This is not true of the measures 
proposed in Henry George's work, " Progress and Pov- 
erty." The author expresses strong indignation at that 
violation of what he calls natural justice which he regards 
as a necessary consequence of the ownership of land by 
individuals, — ownership which may conceivably be un- 
limited in extent and of indefinite duration. He maintains 
that the requirement of justice that there be equality of 
opportunity to labor can be met only when every human 
being is admitted on equal terms at the moment of birth 
as a tenant in common with all the existing inhabitants 
of the earth. At present the soil has almost everywhere 
fallen into the exclusive possession of a small part of the 
population, the landlords, who permit its use by their 
fellow creatures only on payment of a tribute, called rent. 
In so far as land has been made productive by the labor 
of the owner, or of those from whom he derives title, it 
is just that compensation should be paid, when practicable, 
by such as desire to take advantage of this productiveness ; 
but title by occupation, or prescription, having no founda- 
tion in justice originally, can gain none by lapse of time. 
Those having no other title are regarded as mere tres- 
passers on the common estate, and justice, so far from 
defending their possession, demands that they be evicted. 



UNEARNED PROPERTY 57 

It is only the proprietors of land which commands no 
rent that need not be disturbed; for no one would be 
profited by disturbing them. 1 

So far as the existence of an " unearned increment of 
value " is concerned, i. e. a value not created by the labor 
of the landlord, there is nothing in these statements that 
has not been maintained by Mill and Adam Smith; and 
they both show that there would be no injustice in sub- 
jecting this kind of property to special taxation. The 
term " rent," it is hardly necessary to say, is here used in 
the Ricardian sense, and means only the differential profit 
or revenue derived from exceptionally desirable land, so 
far as its desirableness has not been caused by labor 
directly spent upon it. The exceptional value of such land 
is due to the existence of societies of men, the members 
of which desire to use their productive powers to the 
greatest advantage, and compete with one another for the 
most favorable situations and opportunities. The land- 

1 "If all existing men were to unite to grant away their equal rights, 
they could not grant away the right of those who follow them. For 
what are we but tenants for a day ? Have we made the earth, that we 
should determine the right of those who after us shall tenant it in their 
turn ? The Almighty, who created the earth for man and man for the 
earth, has entailed it upon all the generations of the children of men by 
a decree written upon the constitution of all things — a decree which no 
human action can bar and no prescription determine. Let the parch- 
ments be ever so many, or possession ever so long, natural justice can 
recognize no right in one man to the possession and enjoyment of land 
that is not equally the right of all his fellows. Though his titles have 
been acquiesced in by generation after generation, to the landed estates 
of the Duke of Westminster the poorest child that is born in London 
to-day has as much right as has his eldest son. Though the sovereign 
people of the State of New York consent to the landed possessions of the 
Astors, the puniest infant that comes wailing into the world in the 
squalidest room of the most miserable tenement house, becomes at that 
moment seized of an equal right with the millionaires. And it is robbed 
if the right is denied." 



58 THE METHODS OF TAXATION 

lords, Adam Smith says, who, like other men, love to reap 
where they have not sown, take advantage of this compe- 
tition to exact from their tenants all that the land will 
produce beyond the ordinary return to labor and capital. 
The attention and good management of the landlord may 
in many cases account for some part of the ordinary rent 
of land, but " ground-rents, so far as they exceed the 
ordinary rent of land, are altogether owing to the good 
government of the sovereign, which, by protecting the 
industry either of the whole people, or of the inhabitants 
of some particular place, enables them to pay so much 
more than its real value for the ground which they build 
their houses upon. . . . Nothing can be more reasonable 
than that a fund which owes its existence to the good gov- 
ernment of the state should be taxed peculiarly, or should 
contribute something more than the greater part of other 
funds towards the support of that government." 

We need not say that Adam Smith would not have 
countenanced the view that justice requires the confisca- 
tion of existing ground-rents had it been presented to him ; 
and Mill clearly explains the immorality of such a de- 
mand. It is based upon an absolute theory of justice, 
which, even as an ideal, seems to find little support either 
in reason or experience. If the attempt is made to apply 
it in practice the way is beset with difficulties. For the 
ground-rents of a particular city are caused only indi- 
rectly and in part by its inhabitants. So far as they are 
criminally disposed, or even indolent and improvident, 
their presence positively diminishes the value of the land ; 
and in many cities land values are intimately connected 
with the prosperity of the country at large, and even with 
that of the whole earth. The western farmer, when his 



UNEARNED PROPERTY 59 

grain is exported from New York, pays tribute to the 
landlords there, and the same is true of the people of 
England who consume this grain. Some part of the ex- 
pense of importing and exporting merchandise, according 
to this theory, consists of rent; and some part of this 
charge falls on the producers and consumers of this mer- 
chandise, wherever they may live. 

Were the title to all the land in the city of New York 
vested in the municipal government, justice would require 
that it should distribute its rents not exclusively among 
its own inhabitants, nor the people of the State of New 
York, nor even the people of the United States, but among 
the people of the whole world. Eor an absolute theory of 
justice cannot respect persons, nor discriminate against 
any human being because of race or situation. It cannot 
regard the accident of birth within the limits of a parti- 
cular city or country — no more than the accident of 
priority of time of occupation — as giving any peculiar 
merit; and when a child is born in Warsaw or in Peking 
it becomes at that moment seized of an equal right with 
the millionaires of the city of New York and of all the 
other cities of the earth. 1 Such rights would not be 
enforced by taking the rents of a city from their present 
owners and giving them to all its inhabitants. This would 
be in effect to recognize one of the most odious forms of 
privilege by discriminating not only against aliens, but 
also against citizens born outside of favored places. From 
this conclusion there seems no escape; and if we admit 
that the theory must be modified in practice, it ceases at 

1 Although in the passage quoted above it is laid down that natural 
justice can recognize no right of one man to land that is not equally the 
right of all men, the author elsewhere contended that Chinamen should 
be excluded from the United States. 



60 THE METHODS OF TAXATION 

once to be absolute, and the policy to be followed in its 
modification becomes a question of expediency. 

Indeed, when it comes to the practical redistribution of 
wealth, there seems to be little disposition to apply the 
theory that every human being is entitled to an equal 
share, or even to an equal opportunity to acquire it. The 
members of the white races have almost invariably denied 
such equality to their darker colored brethren, and most 
nations discriminate against aliens, even when they do not 
exclude them. Nor if the absolute nature of the theory 
is modified, and it is asserted only of the members of a 
particular state, do we find any general disposition to 
accept it, unless among those who may be beneficially 
interested. For there are everywhere territorial divisions 
and boundaries of communities, and the residents of every 
community appear to consider it just that they should 
enjoy their own peculiar advantages of situation, and not 
be compelled to make them over to the dwellers in less 
favored places. In other words, the theory in question 
would consistently require that cities should be treated like 
individual men, and distribute the rents that they exact 
among all those from whom they are exacted; while in 
fact even those who advance the theory seem not to regard 
this as just. On the other hand, were the rents of such 
a city as !N"ew York to be employed in giving freely to 
its inhabitants many things which they now obtain only 
by labor, there would probably result a great addition to 
the population, through immigration as well as through 
an increased birth rate. Were this increment of popula- 
tion laborious, it might tend to increase rent, and thus 
exact for the city an additional tribute from the outside 
world, thereby still more encouraging immigration, and 



UNEARNED PROPERTY 61 

so on. But were the people demoralized by this redis- 
tribution of wealth, as appears to have happened when the 
people of Rome received largesses from the rulers, there 
might result a decrease in rent, and a diminution of the 
benefits freely distributed, followed by such social dis- 
orders as are related in Roman history. The fundamental 
weakness of the theory evidently lies in its ignoring desert, 
and assuming mere existence in a certain place to con- 
stitute a just claim to a share in whatever advantages the 
place enjoys, without regard to their cause. 

Were the claim that justice requires the expropriation 
of landlords supported by even stronger arguments, it 
would seem impossible for it to command that general 
assent which we regard as indispensable. Such assent is 
rendered less possible in this country, not only because 
of the great number of land owners, but also because of 
the even greater number of persons who through loans 
secured by mortgages to individuals and fiduciary insti- 
tutions, and through ownership of shares in corporate 
enterprises, belong practically to the same class. To over- 
come the support generally accorded to the constitutional 
provision for compensation when property is taken for 
public use, it would be necessary to convince the members 
of this class, which probably comprises much more than 
half the population, that the confiscation of rent would pro- 
mote the general welfare, if not their own interests. ~No 
doubt it is urged with much force that such confiscation 
would greatly stimulate industry by relieving it of the 
incubus of an idle class; but this result is highly prob- 
lematical. Those without capital could not lease land; 
those with capital are able now to obtain land of which 
they can make profitable use, and their exemption from 



62 THE METHODS OF TAXATION 

other taxes would tend to give them for a short time an 
inordinate profit. 

On the other hand, it is altogether uncertain to what 
extent enterprising men would lease land which they know 
could not, so far as they are concerned, increase in value, 
and from which they might be dispossessed by any one 
who would pay them the cost of producing, or reproduc- 
ing, their improvements. 1 Experience seems to show that 
men are not willing to make very costly improvements 
on leased land unless they hold it for a long time; but 
the advances in the value of land are often very rapid, 
and the " unearned increment " during the term might 
be very great. Yet should there be a decrease in the value 
of land, it might not seem altogether just for the govern- 
ment to compel its tenants to pay rent that they could not 
earn; and while such problems can be dealt with by the 
English rulers when they arise in India, and might be 
if they should arise in Ireland, they could not be so easily 
handled by the governments of our own country. Had 
the owners of tillable land in some parts of England been 
dispossessed a generation ago, and had the government 
relet this land, it might find itself now obliged to forego 
its rent and face conditions similar to those which have 
made Irish landlords so unpopular. 2 

1 It is evident that if unoccupied land is taxed at a high rate in order 
to induce the owners to improve it, the buildings erected will, probably, 
be of a character inferior to what would have been erected had the land 
remained unoccupied until its value had increased. While the com- 
munity might gain an increased present revenue, posterity might suffer 
through the expense of destroying and replacing unsuitable structures. 
To a certain extent, however, this loss is inevitable in a progressive 
society; and were buildings not taxed the process would be 
modified. 

2 Sir A. Milner and Sir R. Giffen, testifying before the commission 
on agriculture in 1896, estimated that the value of farming land in the 



UNEARNED PROPERTY 63 

It should be added that even if we admit it to be prac- 
ticable to distinguish the value of improvements from that 
of the land, this latter value may have been partly created 
by the sagacity of the owner, or by the acts of individuals 
or bodies of men, more than by the labors of the citizens 
at large. Thus the extension of the elevated railways in 
the city of New York increased the value of much land 
three or four fold, and those who ventured their capital 
in an enterprise which was at first of very uncertain out- 
come, might seem to have a just claim to some part of this 
increment, at least as against the landlords, and perhaps 
against the community. For if the enterprise, while en- 
hancing the value of land, had not proved remunerative 
to those who carried it on, it would probably not have 
been thought just to repay them their losses; but if this 
would not be just, it would seem reasonable to allow them 
something more than the ordinary rate of gain, since the 
community was greatly benefited through the happy out- 
come of the venture. The construction of railroads through 
the prairies of the west was followed by an increase in 
the value of land often ten or twenty fold ; and it seems 
unjust that settlers who acquired this land for a nominal 
price should appropriate the whole of an increment that 
was created certainly in part by the capital invested in 
railroad building. 

The value of land may be said to be everywhere 
created by its accessibility as much as by any other 
cause, and the dominant landlords seem therefore to be 
the owners of railroads and canals. But no one would 



United Kingdom had been reduced, because of American competition, 
from about £2,000,000,000 in 1874, to less than £1,000,000,000 in 
1894. 



64 THE METHODS OF TAXATION 

venture to assign a definite increase or decrease of the 
value of a particular piece of land as the effect of the 
construction of the Suez or the Panama canal; and while 
we may be satisfied that the value of farming land in 
England has been greatly diminished, and that of farm- 
ing land in the United States greatly increased, by the 
construction of railways and canals, and by the improve- 
ment of steam engines and vessels, it seems hopeless to 
attempt to apportion the benefits in accordance with any 
theory of justice, or to offset the gains against the losses. 
The difficulty of adjusting the charges for transportation 
is notorious, communities seeming to be as jealous of one 
another as individuals; and were the government to con- 
fiscate the railways, it would be altogether beyond its 
powers to apportion the expected advantages in such a way 
as to satisfy the demands put forth as just by different 
states and cities. Eor it is easy to see that such rates as 
would satisfy one would be ruinous to others, and the 
only practical solution would be by compromises dictated 
by necessity and expediency, and not in accord with any 
absolute theory of justice. The fact that common owner- 
ship of land has everywhere prevailed in the past, and 
been almost everywhere abandoned, must be taken to prove 
that individual ownership is not generally regarded by 
mankind as unjust. 

Apart from considerations of expediency and conveni- 
ence, it seems probable that men recognize the existence 
of an " unearned increment " in the values of other things 
as well as land, and that this increment is, abstractly, no 
more defensible than ground-rent. The theory of those 
who would confiscate ground-rents is too broad to be ap- 
plicable in practice, while as regards personal property 



UNEARNED PROPERTY 65 

it is too narrow and arbitrary. As we have seen, the as- 
sertion that a man has a right to what he has produced 
by his own exertions is ambiguous. Evidently he cannot 
produce matter, but can at most move certain parts of 
it, and separate and combine them for useful purposes. 
This matter, as well as the mere surface of the earth, may 
be subjected to monopoly, being also limited in quantity; 
and justice demands equality in the distribution of the 
former as well as the latter. Indeed we seem to regard 
justice as outraged not so much by the nature as by the 
disproportionate size of possessions; the ownership of 
great accumulations of personalty may be as offensive as 
that of great tracts of land. We cannot well contend that 
no one may rightfully own a diamond mine, while we 
maintain an absolute right to own diamonds which some 
fortunate miner took from it before other persons knew 
that it existed, — perhaps before such persons came into 
existence. Nor does it seem easier, practically, to estab- 
lish a clear title to movable things in general than to real 
estate. As labor has in most cases, at least in long settled 
countries, become inextricably mixed with land, and can- 
not in fact be applied to matter without the possession of 
land, so movables are but detached portions of land. Some 
degree of possession, in short, is indispensable to every 
form of industry. The title to movable things must be 
vested in the landlords or have been derived through them ; 
and if they had no title they could give none. 

Moreover, in spite of the justice of prescriptive right, 
it must be admitted that whatever claim to any form of 
property is attained by labor is in common estimation 
lessened by lapse of time. Hardly any one disputes the 
justice of securing to the laborer the immediate results 

5 



66 THE METHODS OF TAXATION 

of his toil ; but, as years pass on, his claim gradually ceases 
to impress us so strongly, and a presumption appears in- 
sensibly to arise that the due reward of his exertions has 
been paid. The most striking illustration of this tendency 
occurs in the case of authors. It is only in modern times 
that they have obtained legal protection of the results of 
their labors, in spite of the fact that the immaterial na- 
ture of their products excludes the possibility of monopoly. 
The authors property consists merely in the exclusive 
right to repeat, or copy, a particular arrangement of words 
which he has devised, and which no one else could have 
produced, either by accident or design. This right can 
frequently have little value unless it can be sold and 
preserved indefinitely; but the law limits its duration, 
so that it may expire even in the author's lifetime. 1 

In general it seems to be true that the title to very 
desirable things that have come into the possession of such 
as did not produce them is justified on other grounds than 
the original expenditure of labor thereon. Labor being 
conceived as performed in order to satisfy the wants of 
the laborer, the title that it gives must somehow and in 
some degree be commensurate with those needs. As the 
titles to a great number of things may in the course of 
years become vested in a single person, we find ourselves 



1 Probably there is some confusion in the mind of the public between 
copyright and patent right, which has operated to the disadvantage of 
authors. There is, however, no analogy between the cases, the letters 
] >atent granting a monopoly of the use of matter in a specified way, al- 
though the idea of making such use may have occurred to many before 
the letters were granted, and would probably have occurred to others 
long before the term expired. The statute of 1710 accidentally curtailed 
the author's right, which was unlimited at Common Law. The ideas 
expressed by an author become public property; those of the patentee 
can be made use of by others only with his consent. 



UNEARNED PROPERTY 67 

less disposed to regard the labors of tlie original creators 
of these things, than to inquire how their present owner 
is justified in possessing far more wealth than is sufficient 
for ordinary requirements. The right of a man to the 
product of his own exertions may be unquestionable; but 
the right of one man to what has been produced, not by 
his own labor but by that of a hundred others, is different, 
and cannot be justified, as was attempted by Henry George, 
by asserting that what the laborer produces is his for all 
time. On the contrary, it is now coming to be under- 
stood, as we have seen, that rent is a phenomenon not 
peculiar to land, but a generic feature of all property, the 
acquisition of which is not subject to free competition. 
The vogue of the term " unearned " signifies that desert 
is now regarded as an essential element in establishing the 
justice of ownership ; and desert is not an inherent quality 
of wealth, whether real or personal, and cannot be trans- 
ferred or inherited. There may be good reasons for main- 
taining existing rights of property in general ; but, so far 
as abstract justice is concerned, property in land seems no 
less defensible than such personal property, at least, as 
consists of portions of matter. 

While moralists have always maintained the justice of 
compensating desert, or service rendered to society, this 
view has now become so prevalent that we might say that 
desert is regarded as limiting, at the same time that it 
supports, the right of property. As Mill remarked, no 
man works by himself in our modern world. In every act 
of his life he is aided by the present or past cooperation 
of others, and as nothing is the product exclusively of 
his own exertions, he can maintain no absolutely exclu- 
sive right in what he is said to produce. The creation 



68 THE METHODS OF TAXATION 

of wealth to any considerable extent is possible only 
through the organization of industry. In this organiza- 
tion, and in its defense and protection, nearly all the 
members of society may be said to participate, and they 
justly share in the wealth that could not have been pro- 
duced without their participation. When Adam Smith 
observed that ground-rents were altogether owing to the 
good government of the sovereign, or, as we should say, 
to the existence of an orderly society, he stated a law, as 
we have seen, that is not applicable to land alone. The 
wages of labor and the profits of capitalists are beyond 
question increased by the security afforded by a good 
government, and this increase may be an " unearned in- 
crement " as much as the rent of land. Hence we find it 
maintained that whoever possesses wealth of any kind, 
acquired without rendering any service to society, may 
with justice, according to the principle stated by Adam 
Smith, be taxed peculiarly, or contribute something more 
than others to the support of the government. 

In opposition to this claim it is plausibly argued that 
the actual difference between the deserts of different men, 
measured by the values of their services, is far greater 
than is commonly understood. An incompetent or dis- 
honest servant frequently does his master more harm than 
good. He injures or makes away with what is committed 
to his charge, so that the value of his services is actually 
negative. A faithful and capable servant, on the other 
hand, may greatly improve his master's property. Were 
the results of his management compared with those of the 
bad servant's, his desert might be measured by the whole 
value of the property affected, for he has both preserved 
and increased it, while the other would have destroyed it. 



UNEARNED PROPERTY 69 

So in manufacturing or mercantile business, a bad man- 
ager may cause the loss of the whole capital invested, 
while it may be doubled by a good manager. In the same 
way a bad lawyer will lose a case which a good one would 
have gained, and a capable physician will save the life 
of a patient who would have died under the treatment of 
an incompetent practitioner. So whoever invents a method 
of attaining any useful result with less labor than has been 
before required, or discovers some new property of matter, 
may render a valuable service to all mankind, and deserve 
a corresponding recompense. In all such cases the size 
of the reward, it is claimed, is often less than would be 
justified by the value of the service rendered. The com- 
munity is really richer, after paying this reward to its 
servants, than it would have been had their service not 
been rendered, and their compensation, so far from being 
greater than they deserve, is less than justice would award 
them. Certainly, we can hardly estimate in millions, or 
perhaps billions, of dollars the value to the world of the 
services of the inventors of the steam engine and the 
sewing machine; and money cannot measure our debt to 
the discoverers of ansesthetics and to those who have de- 
veloped antiseptic surgery. 

There is much force in this argument, and its validity 
is to a certain extent generally admitted. It is possible, 
of course, to say that nature is itself unjust in its distri- 
bution of natural endowments, and that those who have 
been favored by birth or ancestry with exceptional strength 
and ability are not on that account meritorious or de- 
serving. But this is carrying the analysis further than is 
demanded by common sense, and congenital superiority is 
generally regarded as justly entitling its possessors to cor- 



70 THE METHODS OF TAXATION 

responding rewards ; otherwise the survival of the inferior 
would be encouraged. Conceding this, however, it may 
be replied that the argument amounts to little more than 
an explanation of the methods according to which rewards 
are now distributed, and begs the question of their justice. 
This appears more clearly if we press the argument, and 
inquire whether it would be just for a physician of ex- 
ceptional skill to refuse to save the life of a rich man 
unless the patient would requite him with the whole of 
his fortune, or whether lawyers might justly charge their 
clients fees equal to the sums which but for their labor the 
clients would have lost. The exaction of such payments 
would be universally condemned as unjust; yet, strictly 
speaking, it would be no more than equivalent in value 
to the service rendered. In common speech conduct of 
this kind is described as taking an unfair advantage of 
the necessities of the person served, and this implies some 
other standard of justice than that employed when we 
measure value of services by the loss which would be 
suffered if they were not rendered. But, when we ask 
what this standard is, we are usually referred to what 
is customary; and in practice the justice of a charge 
or compensation in any particular case is apt to be 
determined by what others would charge for the service 
under like circumstances. We still lack some element 
enabling us to say whether customary payments are just 
or not. 

Yet some light is thrown on the problem by this exami- 
nation, for the appeal to what is customary suggests the 
existence of competition among those who have services 
to sell. We may assume that whenever anything or any 
service is found to be of great value to the community, 



UNEARNED PROPERTY 71 

many persons will endeavor to furnish the necessary supply, 
and that after a time the compensation obtained by such 
persons will, in many departments of industry, tend to 
become no greater than what they would obtain by em- 
ploying their time and money in other occupations. Hence 
in a community where perfectly free and speedy compe- 
tition prevailed, the customary rewards would tend to 
be the same as those required by ideal justice. For if any 
one attempted to charge more for his services than their 
equivalent, measured by their " cost of production," others 
would soon underbid him. Thus no one could obtain ex- 
ceptionally large compensation unless his service were of 
such exceptional value as was due to his individual excel- 
lence, — a kind of desert which we must for practical pur- 
poses agree to accept as a part of the natural order of 
things. In this way the issue becomes really one of fact 
and may therefore be decided by evidence furnished by 
experience. Accordingly we find those who assert the 
justice of the existing distribution of wealth maintaining 
that free competition exists, and appealing to the many 
instances where poor men have acquired great wealth, as 
proof that rewards are fairly proportioned to deserts. 

There are undoubtedly so many cases of this kind as 
to constitute some approximation to justice, and to make 
the mass of mankind tolerably submissive to existing in- 
stitutions. Yet, when we consider the facts, it appears 
that many great fortunes are acquired by those who have 
avoided, or been relieved from, competition. Inventors 
seem to be a peculiarly deserving class of citizens, but the 
effect of the patent laws is to favor those who are prior in 
their application, to the total exclusion of others whose 
desert is substantially equal. It frequently happens that 



72 THE METHODS OF TAXATION 

a number of persons are in search of some improvement, 
and discover it simultaneously; but while one becomes 
very rich from the monopoly granted him by law, the 
others are prohibited from making any use of the product 
of their labors. It is equally notorious that inventors 
have been sometimes unable through poverty to make 
profitable use of their discoveries, and that those who have 
furnished them money have obtained the greater share of 
the gains arising from their patent rights. Much the same 
is true of the discoveries of mines ; the fortunes made by 
those who have purchased the claims of these discoverers 
being especially conspicuous illustrations of wealth ac- 
quired through exemption from competition. The public 
has been abundantly informed also that many large for- 
tunes have been created by the rapid advance in the value 
of land, which is attributed to the relative scarcity caused 
by the growth of population and the attendant monopoly 
obtained by the land owners. In some notable instances 
great wealth is thought to have been accumulated by men 
engaged in manufacturing, by means of rebates, or unfairly 
low rates of transportation, which have enabled them to 
undersell their competitors. 

It is notorious also that temporary monopolies arise in 
every branch of trade, through control of the supply of 
any staple commodity. Bagehot, in speaking of the power 
of the Bank of England to fix the rate of interest, ob- 
serves " A single large holder, — especially if he be by 
far the greatest holder, — may fix his price, and other 
dealers may say whether or not they will ask more than 
he does. A very considerable holder of an article may for 
a time vitally affect its value if he lay down the minimum 
price which he will take, and obstinately adhere to it. 



UNEARNED PROPERTY 73 

This is the way in which the value of money in Lombard 
Street is settled." * 

This description applies to numberless " corners," or 
temporary monopolies ; and perhaps most of the great for- 
tunes made in commerce have been due to sagacious specu- 
lation concerning the fluctuations of demand and supply. 
The methods employed are too familiar to require mention ; 
but they are frequently such as forbid the speculator to 
assert that his gain is justified by any service to the com- 
munity. For such operations in modern trade very great 
capital is necessary; only the possessors of large fortunes 
can engage in them. Such fortunes have thus come to be 
denounced by many writers as equally unjust in their 
acquisition and in their employment; they are said to be 
created at the expense of the public and used to its detri- 
ment. The ability of their possessors, it is maintained, is 
misdirected. Their labor is pernicious; and those to 
whom their wealth passes hold it by a title resting in law 
and not in justice. 

In recent times many fortunes have been made in " re- 
organizing " and in combining enterprises, by persons 
standing in such relations to these enterprises as to make 
it impossible for others to compete with them. In these 
affairs the possession of exclusive information concerning 
important plans or " developments," has enabled those 
favored to enrich themselves. Through family influence, 

1 "The reason is obvious. At all ordinary moments there is not 
money enough in Lombard Street to discount all the bills in Lombard 
Street without taking some money from the Bank of England. As soon 
as the Bank rate is fixed, a great many persons who have bills to dis- 
count try how much cheaper than the Bank they can get these bills dis- 
counted. But they seldom can get them discounted very much cheaper, 
for if they did every one would leave the Bank and the outer market 
would have more bills than it could bear." 



74 THE METHODS OF TAXATION 

or friendship, and by political favor, many lawyers obtain 
lucrative positions or profitable business ; and the methods 
of obtaining public office are notorious. Physicians, as a 
rule, must depend more on their own abilities to meet 
competition; but they are often aided by personal influ- 
ence, and only popular authors and artists have clear titles 
to the comparatively modest fortunes which they acquire. 
In all the other cases, it may be contended, the services for 
which such great rewards have been received are either 
of little value to society, or would have been rendered for 
very much less had competition been allowed. Much 
wealth, it must be admitted, is acquired by fraudulent use 
of their position by trustees, and much by positive cheating. 
Much, too, is acquired by gambling, including under this 
term a large part of the transactions on the exchanges ; and 
in such cases it is obvious that the gains of one speculator 
are made up of the losses of others. 

Making every allowance for popular exaggeration, there 
seems to be sufficient truth in the foregoing statements to 
render it impossible to regard the title to many fortunes 
as justified by the deserts of their proprietors. The facts 
in many cases are too well known in the business world 
to be disputed, and some of them have been judicially es- 
tablished. Without going to the length of asserting that 
every poor man is by virtue of his poverty incapable of 
competing on fair terms with the wealthier persons to 
whom he must sell his labor, we cannot deny that competi- 
tion is so imperfect in certain departments of human 
activity as to enable many persons to obtain wealth with- 
out rendering corresponding services; and this seems to 
imply that such equality of opportunity as justice would 
require does not prevail. 



UNEARNED PROPERTY 75 

Yet, so far as existing wealth is concerned, there is some 
ground for regarding this conclusion as mistaken. The 
fact that the title to great possessions is vested in a single 
individual by no means proves that the opportunities of 
others to acquire wealth are thereby limited, or that com- 
petition is thereby prevented. For the wealth of the rich 
man must usually be, as we say, " invested " ; L e., it must 
be employed as capital in producing more wealth; which 
is indeed a most effective way of increasing opportunities. 
This process necessarily furnishes opportunities for activ- 
ity, both to those who know how to use capital effectively, 
and to laborers, and perhaps under the most advantageous 
conditions. If the same amount of wealth were divided 
among a hundred owners, it might either be invested by 
them, as it was by the sole owner, or used directly; in 
which case they would take the place of the former users. 
So far as production on a large scale is advantageous, the 
tendency would be to investment; and, so far as income 
is concerned, the rich man is perhaps more likely to re- 
invest it than the man in moderate circumstances. The 
division of wealth might thus operate to reduce the rate of 
its production, and in that way to restrict rather than to 
enlarge opportunity ; for it cannot be too strongly empha- 
sized that to invest capital and to furnish employment to 
laborers are the same thing. Furthermore, experience 
seems to prove that the capacity to manage capital is rare ; 
for, of those who undertake mercantile business, which is 
perhaps the simplest form of business, it is said that ten 
fail where one succeeds, and such persons are not apt to 
be wiser when they invest in the enterprises of others than 
when they attempt management for themselves. And 
many would agree with Adam Smith that the management 



76 THE METHODS OF TAXATION 

of industrial affairs by government is almost always waste- 
ful, and that to appropriate a large part of the wealth of 
the rich for public uses would tend to impoverish the people, 
by creating a privileged class of placeholders who consume 
wealth that would otherwise be employed productively. 

It is urged, also, that the injustice complained of — the 
denial of opportunity to acquire wealth — would not be 
removed by confiscating the large estates that now exist; 
for this would not remove the causes of such accumulation, 
but might rather intensify them. History furnishes abun- 
dant evidence that whenever rulers undertake to deprive 
wealthy subjects of their possessions, such uncertainty as 
to the security of property takes place, as to furnish, not 
equality of opportunity to the common people, but excep- 
tional opportunity to the boldest and most unprincipled 
speculators. And if we review the methods by which for- 
tunes have been acquired, it does not appear that men 
would be deterred from such acquisitions by the threat of 
future confiscation; on the contrary, the withdrawal of 
the more scrupulous might enable the less scrupulous to 
make even greater gains. In this view, justice would be 
more nearly attained by repealing the laws that prevent 
free competition in acquiring property, than by confiscat- 
ing property acquired through the operation of such laws. 

These arguments, however, rest to a great extent on an 
assumption that is disputed. The rich man may invest 
judiciously some part of his income; but he also makes 
unwise investments, and he certainly uses some part of his 
wealth in unproductive expenditure. He is tempted to dis- 
play his affluence ; he may build palaces, and keep many 
carriages, and a large retinue of servants. Still it cannot 
be assumed that, if his wealth were distributed, those who 



UNEARNED PROPERTY 77 

received it would not also use it in building more costly 
houses and in keeping more carriages and servants; for 
we know that so soon as men find themselves able, they are 
apt to indulge in these very forms of expenditure. The 
same is true of dress and of furniture; their expense al- 
most always increases with income. On the other side of 
the account, we find it urged that rich men give away vast 
sums of money for numberless public purposes, as well as 
in their private charities; and some of the most liberal 
of them have lived very simply. Were they deprived of 
their wealth, it is conceivable that institutions which now 
furnish opportunities to many poor people to better their 
condition would perish, and many needy and helpless per- 
sons would become destitute. But there is much evidence 
that liberality is not less, in proportion to income, among 
men of moderate wealth than among the very rich; and, 
if wealth were more diffused, there would be less need to 
extend aid through eleemosynary channels, either public 
or private. While society owes much in a thousand ways 
to the refined and enlightened benevolence of the "leisure 
class," we cannot say how much it might owe to members 
of other classes were their leisure increased. 

On the whole, we seem to be obliged to fall back on the 
general principles of ethics ; and if we do so, there is no 
way of escape from Bentham's conclusions. We must 
admit that wealth is, taking all things into consideration, 
a source of happiness (or of welfare, if that term be pre- 
ferred) ; and that such happiness, in the case of an indi- 
vidual man, does not increase in proportion to the amount 
of wealth that he possesses. It may be maintained that 
this proposition is not true when the quantity of wealth 
is small. A man who cannot procure what is necessary 



78 THE METHODS OF TAXATION 

to support life must be unhappy, and to increase his in- 
come might therefore increase his happiness out of all pro- 
portion to the quantity of the increment. But this does 
not appear to hold true after the ordinary desires and 
tastes have been satisfied. Even if the attempt to arrange 
pleasures in a quantitative scale were to succeed, common 
sense would never admit that the feelings of one man 
should in practical affairs outweigh those of a thousand 
others. Men in general unquestionably believe that, if the 
expenditure of wealth is pleasurable, the quantity of pleas- 
urable feeling — even allowing for quality — is greater 
when a large number of persons are able to indulge luxu- 
rious tastes than when the ability is confined to a few. 
Hence if the total amount of wealth spent unproductively 
by a hundred persons would be no greater than that spent 
by one, if he owned most of it, the capital of the community 
would not be impaired, while its happiness would be in- 
creased by a more equal distribution. Conceding that 
great fortunes do not limit opportunities for the acquisition 
of wealth, at least to the extent often asserted, and that 
they may even tend to increase the aggregate wealth of 
the community, it seems impossible to deny that their ex- 
istence is commonly believed to diminish the quantity of 
happiness potentially enjoyable by its members, if not the 
quantity actually enjoyed. This opinion, as we have be- 
fore observed, is held by many who do not think such 
potential happiness to be practically attainable by means 
of taxation ; or indeed by any compulsory system. 

In this discussion we have hitherto ignored the existence 
of family relations, and considered the right of property 
to belong exclusively to individuals, as some writers on the 
subject, even in modern times, and in spite of such a con- 



UNEARNED PROPERTY 79 

spicuous fact as the feudal tenure of land, have frequently 
done. But it is now commonly maintained that this right 
was originally vested in communities. The Civil Law is 
thought to have based the right, in part at least, on the in- 
stitution of the family. The father and the son were re- 
garded as in a sense one person, so that, on the death of 
the one, the property rather continued than descended. It 
is certainly true, at the present day, that men everywhere 
regard it as the duty of parents to provide sustenance for 
their children until they are able to support themselves, 
and this is commonly a legal obligation. Hence the title 
conferred by labor requires to be somewhat enlarged. 
Justice must authorize men to acquire by their exertions 
wealth sufficient for the maintenance, not only of them- 
selves, but also of their families. This obligation, too, is 
not thought to terminate with life ; for, while men are not 
required by law to accumulate wealth on which their fami- 
lies may live after they die, they are praised for doing so. 
Indeed, the advance of civilization may be measured by 
the extent to which accumulation for this purpose prevails, 
and the encouragement which is given in many ways by 
law to such accumulation indicates that it is commonly 
regarded as just. 

The principle that the labor of the possessor of wealth 
constitutes the sole justification of his title plainly does 
not apply in this case. In spite of the emphatic endorse- 
ment given by Mill to the right of free acquisition by 
contract, he appears to admit that those who acquire with- 
out exertion the fruits of others' labor have but a limited 
title. 1 Very young children often possess wealth " trans- 

1 "Private property, in every defense made of it, is supposed to mean 
the guarantee to individuals of the fruits of their own labor and absti* 



80 THE METHODS OF TAXATION 

mitted to them without any labor or exertion of their own," 
and this is true also of those who receive wealth by gift, 
as in many cases no valuable consideration is returned by 
them to the giver. Yet we do not think that justice for- 
bids us to accept gifts, for we hesitate to call giving unjust, 
and are perhaps rather inclined to commend it as often 
a means of lessening the inequalities of fortune. In the 
case of children, it is obvious that if their parents do not 
provide for their support, others must do so; while by 
means of this parental support they become capable of ren- 
dering services of value to society. And giving may be 
defended by similar reasons; for the recipients of gifts 
are often as needy as children, and equally helpless, and 
the gifts may enable them to become self-supporting. In- 
deed, it is on this ground that our system of free schools 
is defended. 

But while the right to acquire and to transfer the prod- 
ucts of labor is thus enlarged, so as to include more than 

nence. The guarantee to them of the fruits of the labor and abstinence 
of others, transmitted to them without any merit or exertion of their 
own, is not of the essence of the institution, but a mere accidental conse- 
quence, which when it reaches a certain height, does not promote, but 
conflicts with the ends which render private property legitimate." 
Pol. Ec, Book II, Chap. I, § 3. Compare this with the following: "The 
right of property includes, then, the freedom of acquiring by contract. 
The right of each to what he has produced implies a right to what has 
been produced by others, if obtained by their free consent; since the 
producers must either have given it from good-will, or exchanged it for 
what they esteemed an equivalent, and to prevent them from doing so 
would be to infringe their right of property in the product of their 
own industry." Book II, Chap. II, § 1. Compare also this proposition: 
"Unlike inheritance ab intestate, bequest is one of the attributes of prop- 
erty; the ownership of a thing cannot be looked upon as complete with- 
out the power of bestowing it, at death or during life, at the owner's 
pleasure; and all the reasons which recommend that private property 
should exist, recommend pro tanto this extension of it." Ibid., § 1. Mill 
distinguished limiting the capacity to take bequests from restricting the 
power to make them. 



UNEARNED PROPERTY 81 

suffices for the needs of the individual producer, it is sub- 
ject to the same limitations. Society cooperates in the pro- 
duction of this additional wealth, and the rights of children 
and other beneficiaries are qualified by the claims of the 
community. Whatever is necessary for the support of 
those who cannot support themselves must somehow be 
provided, as a matter of justice ; for in this country, and 
in some others, it may be demanded of the state as a legal 
right. We may perhaps go somewhat further in this direc- 
tion, as most men probably do not consider it just that 
the children of the rich, who have been used to a generous 
mode of life, should be reduced at once, on the death of 
their parents, to the condition of the poor. But we cannot 
go beyond this point without encountering a widespread 
opinion that the right of property is extended too far, when 
a very great quantity is transferred at the death of its 
owner to persons who have had no part in producing it. 
This is indicated by the favor with which the taxes known 
as death duties, or transfer, or succession, or inheritance 
taxes, are coming to be regarded. These taxes are intended 
to fall heaviest on large estates, and on those who are pre- 
sumed to have had least claim to be supported by the 
decedent. Whether these taxes actually fall where they 
are intended or not, we cannot doubt that their purpose 
is called just by a large portion of the community. As no 
satisfactory method of diminishing great fortunes during 
the lives of their possessors has been discovered, the in- 
equality, it seems to be thought, is somehow corrected by 
preventing them from transmitting these fortunes to those 
whom they wish to enjoy them after their death. 

In a society which may be said to be founded on barter, 
where the energies of the citizens are intensely devoted to 



82 THE METHODS OF TAXATION 

bargaining, and where nearly all public servants demand 
pecuniary compensation for their services, it is inevitable 
that the view of justice proper to a contractual regime 
should prevail. Where nothing is done except for a con- 
sideration, the value of the consideration will be closely 
scrutinized; and whoever possesses much of value for 
which he appears to have given no consideration, will find 
many to question the validity of his title. Some excep- 
tion is made in favor of children and a few other bene- 
ficiaries ; " natural love and affection " is admitted by the 
law as a consideration for a grant. But these exceptions 
seem to be made only when small estates are concerned. 
The great inequalities of wealth cannot be satisfactorily 
explained as due to corresponding differences of desert; 
and not infrequently wealth and desert seem to vary in- 
versely. As to how much wealth any individual may justly 
own, no reasoned convictions appear to prevail. Million- 
aires would perhaps agree that no one could justly possess 
a hundred millions, while poorer people may question the 
justice of the millionaire's title. Perhaps the line would 
be drawn a little above the amount of wealth sufficient to 
maintain a family of average size in comfort, measured 
by the standard of the lower middle class. ~No doubt 
greater possessions would often be recognized as due to 
greater desert; but this would be less and less true as 
estates increased in magnitude. 

Indeed, when we consider all that is implied in the the- 
ory of political equality on which our government is 
founded, it seems unreasonable to expect the " average 
man " to be sincerely convinced that the possession of 
great wealth implies corresponding desert, or excellence. 
Some superiority in capacity, and even in virtue, may 



UNEARNED PROPERTY 83 

be conceded ; but the good opinion which every man natu- 
rally has of his own deserts and abilities forbids him to 
admit that his neighbor is a thousand, or a million, times 
more meritorious than himself. Humility and self-depre- 
ciation are not so common as to make it conceivable that 
extreme inequalities of wealth can ever be harmonized 
with the theories of justice that predominate in a democ- 
racy. As Aristotle bluntly says, those who have the polit- 
ical power will have their own views of what is just ; and, 
however erroneous these views may seem to disbelievers 
in political equality, they must be accepted as necessarily 
influencing the institutions of a society founded on this 
theory. It is true that the lack of desert on the part of the 
rich does not logically imply its existence among the poor ; 
the desert of many of them is a negative quantity. When 
we come to the problem of distribution, it is not easy to 
maintain that all the poor, without regard to merit, are to 
share in the wealth which the government is to take from 
the rich. Indeed, on the theory that wealth must be earned 
by service, men in general have no valid title to the vast 
accumulations left by past generations; we are obliged 
to regard their inheritance of all the ages as the gift of 
nature. Nor if unearned wealth is believed to corrupt the 
morals of the rich, as is sometimes asserted, is it apparent 
why it should not have the same effect on the morals of 
other classes. Notwithstanding these considerations, it 
does not seem to admit of question that most men think 
that a more equal distribution than now prevails would 
better accord with justice, even if certain members of the 
community obtain, in the process, more than they deserve. 
Before the application of these principles is considered, 
it may be well to restate briefly the conclusions reached 



84 THE METHODS OF TAXATION 

in the last two chapters. We have found that the analogy 
drawn by Adam Smith between the members of a body 
politic and the tenants of a great estate is fallacious, be- 
cause these members have entered into no such agreement 
as that made by tenants with their landlord. Even if such 
an agreement were implied, it could bind only one genera- 
tion; and no one contends that human institutions are 
not properly subject to alteration. At present the dis- 
tribution of wealth is admitted to be very unequal; and 
this is thought to deprive some men of a reasonable oppor- 
tunity to acquire wealth. For the theory of political equal- 
ity seems to imply that men ought to be able to acquire 
equal quantities of wealth. The claim is made that such 
equality is unattainable if property is recognized ; but the 
evidence fails to support this claim, and the preservation 
of property under the regime of universal suffrage indi- 
cates that it is a permanent institution. But this does not 
signify that property may not be modified, and if we ex- 
amine the arguments advanced in its support we find that 
many limitations have been recognized. Nothing is gained 
by calling it a natural right; but it may be called sacred 
in the sense that men's possessions cannot justly be taken 
for public use without compensation. Even in the case 
of property in human beings this principle has been recog- 
nized, nor is it really affected if we admit the right of 
revolution. It seems to rest on two principles: that men 
may justly own the product of their labor, and that it is 
just to compel them to keep their contracts. In a sense, 
occupation may be regarded as labor ; but strictly it seems 
> give title only to what is needed for subsistence. To 
so much wealth it gives an indisputable right; to more 
than this it gives no such title, at least while there are 



UNEARNED PROPERTY 85 

men who cannot support themselves because others have ap- 
propriated more than they need. But as man is a barter- 
ing animal, civilization being impossible without freedom 
of transfer, title by exchange and by prescription must 
be recognized ; and as the condition of the poor is always 
miserable where any uncertainty exists, justice is better 
attained by such recognition. For similar reasons, men 
must be held to their promises by force of law; and, on 
the other hand, rulers are restrained from making laws 
that impair promises. Yet the promises of rulers, as they 
may affect posterity, are less binding than those of private 
individuals; and, especially when made to corporations, 
are accepted as subject to rather extensive modification 
and revision, although not to actual repudiation. 

No little ingenuity has been expended in the endeavor 
to show that property in land, or its rent, is of a different 
nature from other property. This claim is based on the 
view that land has a value due to scarcity, and that land- 
lords may deprive the rest of the people of the earth even 
of standing room. Hence it has been proposed that what- 
ever value land may have because of its scarcity should 
be confiscated, the rents being applied to public uses. 
But no practical scheme for distributing this value among 
all the inhabitants of the earth has been suggested, and 
justice would not be satisfied by making such distribution 
among the dwellers in places where land has exceptional 
value. In fact it would be altogether impossible to ascer- 
tain the persons to whom particular lands may owe their 
increased value, as appears when we consider the effect 
of the construction of highways, etc. But the fundament 
objection to the claim is that in so far as value is due to 
scarcity, there may be an " unearned increment " of value 



86 THE METHODS OF TAXATION 

in nearly every thing that is the subject of property. It is 
matter, rather than land, that may be scarce, and advances 
in the value of personal property are perhaps more ex- 
treme than those in the value of real estate. On the other 
hand, there seems to be little support for the claim that 
the expenditure of labor on matter creates an absolute 
and indefinitely transmissible title, for eventually this 
title may be vested in persons who have done nothing 
whatever to earn it. 

Justice, however, appears to demand that some consid- 
eration of benefit to society should support property; and 
the concept of desert is in modern times of increasing 
importance. Yet it seems vain to try to measure desert, 
or to lay down any rule of proportion between desert and 
wealth. Were competition free, it might be supposed that 
men's wealth would measure the value of their services; 
but the hindrances to free competition are innumerable, 
and perhaps in the nature of things insuperable. Eor is 
it clear that the existence of great wealth in the possession 
of one man decreases the wealth, actual or potential, in 
the possession of others ; and in some cases it is clear that 
it does not. But, if wealth is a source of happiness, it 
cannot be denied that the aggregate of happiness would 
be greater when many persons were wealthy than it would 
be if ownership were more concentrated. These conclu- 
sions are subject to some modification when we consider 
that the possessor of wealth is presumptively a father of 
a family and responsible for its support. But these modi- 
fications relate chiefly to estates of limited size, and 
do not materially alter the prevailing opinion concerning 
very great fortunes. Hence there is a manifest disposi- 
tion to question the right to obtain much more than is 



UNEARNED PROPERTY 87 

sufficient for comfortable existence by gift or bequest; 
for such property seems to be peculiarly " unearned.' ' 
And this tendency is likely to be marked in a society where 
nearly every one may be said to be engaged in trade, and 
where a consideration is looked for in every transaction. 
When the government of such a society is based on uni- 
versal suffrage, it is not to be expected that the mass of 
mankind, even if not controlled by envy, will consider that 
great wealth implies corresponding desert, or will not think 
it just to attempt to diminish the inequalities of fortune. 

Admitting the prevalent assumption that a few men 
possess much more wealth than they have earned, and 
that the great majority possess much less than they have 
earned, it follows that, in such a society as ours, at least, 
the principle of the proportionate method of taxation does 
not commend itself as fundamentally just. Were our 
government to succeed in compelling its subjects to con- 
tribute to its expense in proportion to the revenues that 
they respectively enjoy under its protection, the chief 
ground of complaint would still remain. If the revenues 
of individuals are to be considered in levying taxes, it 
seems clear that the progressive, rather than the propor- 
tionate method is ideally just. The ratio of contribution 
should increase geometrically, not arithmetically; every 
increment of wealth beyond a certain quantity being re- 
garded as earned, in part at least, by the members of the 
society collectively, and not wholly by the individual in 
whom the legal title to it is vested. ~No doubt, as we have 
seen, the qualification of desert is to some extent ignored 
in the process of distribution; all the poor, irrespective 
of merit, are to be relieved of a part of their burden. Eut 
the rain falls on the just and on the unjust, and in prac- 



88 THE METHODS OF TAXATION 

tice the injustice of benefiting the worthless is disregarded, 
if it is unavoidable when we would reward the deserving. 

It is obvious, however, that we beg the question if we 
assume that an ideal distribution of wealth can be pro- 
duced by means of taxes. We cannot even assume that 
greater equality of fortunes can be so produced. Such 
attempts may but aggravate the evil which they are meant 
to cure, and create more inequality than they remove. 
Before we adopt any conclusion on such a subject, we 
must inquire what is to be learned from experience. Now 
it is evident that, for the strict application of either of the 
first two methods, it is indispensable that the government 
should ascertain the amount of the wealth, or of the 
revenue, of every subject. Without this information it 
is plainly impossible to graduate taxation either propor- 
tionally or progressively. If it cannot be obtained for the 
one purpose, it cannot for the other; and unless it is 
obtained, we cannot say that justice is promoted by either 
method. Of the progressive method we have had, in this 
country, but little experience, while the proportionate 
method has been employed, nominally at least, in all our 
states. We may therefore proceed to inquire how far its 
application has in practice resulted in the attainment of 
its ideal ; and, in so far as it has failed, how far, from the 
same causes, the progressive method must also fail. 



CHAPTER IV 

PRACTICAL APPLICATIONS OF THE PROPORTIONATE 
METHOD 

Were it generally admitted that wealth consists only 
in material things, and were ownership limited to things 
within the jurisdiction of the government to which the 
owners are subject, it might be practicable to apply the 
proportionate method without inquiry into the circum- 
stances of individuals. For all wealth being taxed at a 
certain ratio, every individual owner would presumptively 
contribute his proportionate share. The immense number 
of rights of property which, although invisible and in- 
tangible, are commonly regarded as wealth, and the ex- 
tension of these rights into remote jurisdictions, make this 
simple solution unavailable. In the alternative, the amount 
of the possessions of every individual must be ascertained. 
Whether he is to be taxed according to a simple or a 
progressive ratio, the total quantity of his property must 
be known to the tax-gatherer before the ratio can be ap- 
plied in practice. Without this knowledge the ratio would 
be altogether indeterminate, and its application could be 
just only by chance. 

Various methods of obtaining this necessary information 
have been resorted to by rulers, but they can all be ar- 
ranged in two classes. Inspection or examination by others 
than the owners of the property to be assessed is one 
method; disclosure, or confession, by the owners is the 
other. The methods may be combined, and both are in 



90 THE METHODS OF TAXATION 

common use. A modification of the method of inspection 
appears in the practice of inferring that the possessor of 
certain property is the possessor of other kinds, and espe- 
cially that he who indulges in what are deemed luxuries 
must have an income corresponding with this expenditure. 
Such inferences may conceivably be valid and useful ; but 
we shall find that as ordinarily drawn they are too con- 
jectural to be regarded as meeting the requirements of 
justice. 

In a community where agriculture is the chief industry, 
where the habits of life are simple, the quantity of wealth 
small, and commerce insignificant, it is conceivable that 
the assessors of taxes may form by inspection approxi- 
mately correct judgments of the value of the property of 
every citizen. Such wealth as exists is nearly all visible, it 
is situated within the geographical limits of the commun- 
ity, and it is not subject to frequent changes of ownership. 
These having been in earlier times the conditions prevail- 
ing in the states of this Union, the measure known as the 
general property tax was universally adopted. By this 
measure every person is assessed annually at the place of 
his residence for all real estate owned by him in that 
place, and usually for all, or almost all, personal property 
owned by him, wherever it may be. Real estate owned 
by nonresidents is taxed where it is situated. Under this 
system it is obvious that, so far as regards real estate, 
while the several assessors may be ignorant of the amount 
owned by any person, he would yet be taxed on the whole 
of his possessions. So far as real estate is concerned, 
therefore, the general property tax would conform to the 
proportionate method of taxation; but unless the knowl- 
edge obtained by the assessors of the several communities 



THE PROPORTIONATE METHOD 91 

were communicated to the whole body, the progressive 
method could not be applied. 

For reasons which will presently be explained, it has 
in many states been thought necessary to supplement the 
method of inspection by the method of disclosure, or self- 
assessment. In these states, owners of property are di- 
rected by statute to report to the assessors all their pos- 
sessions, with their value, and to swear that their reports 
are true. In some states such reports are required only 
when the taxpayer objects to the valuation put on his 
property by the assessor, but in other states every one is 
commanded to make them, under penalties of varying de- 
grees of severity. As this requirement of a sworn return 
was very early introduced, it is probable that the method 
of inspection was even then found insufficient. 

But whether the method was satisfactory or not in a 
primitive state of society, it long since ceased to be avail- 
able, as to personal property, in most parts of this coun- 
try. The population of the cities has enormously increased, 
manufactures have everywhere sprung up, commerce has 
advanced with prodigious strides, and all industrial trans- 
actions have been wonderfully quickened. Property has 
taken on many new forms, and is little affected by spatial 
limitations. The fact that a rich man resides in a particu- 
lar town and a particular state establishes but a slight 
presumption that much of the property from which he 
derives an income is situated in that town or in that state. 
He may own land in every state in the union, and he may 
be a creditor of the British Government, or the empire 
of Japan. Under such conditions the method of inspec- 
tion does not produce an equal distribution of the burden 
of taxation. Such persons as have property only at the 



92 THE METHODS OF TAXATION 

place of their residence are practically, as a rule, assessed 
at a higher rate than those whose property is situated 
elsewhere. The assessors may he able to discover the 
existence of the property belonging to the former class, 
but to discover that of the latter is in most cases quite 
beyond their power. 

The essential differences between real and personal 
property, and between visible personalty and choses in 
action, or invisible and intangible rights, have become 
much more conspicuous as the modern economic system 
has developed; but some of them have been always ob- 
servable. In the first place, land is visible and immovable. 
The tax-gatherer and every other person can see it, and 
the owner cannot remove it, or hide it. Certain kinds of 
personal property are visible; but they can be removed 
and concealed. Title to such property passes by delivery, 
and nowadays with great frequency. The same things 
may be owned by several persons on the same day, and 
by a hundred persons in the same year. Into the daily 
consumption of an inhabitant of any city there enter mate- 
rials drawn from every part of this country and from 
every quarter of the earth. The bread that he buys of the 
baker is made from flour that the baker bought from the 
jobber, and the jobber from the wholesale dealer or the 
miller. The miller ground it from wheat that may have 
been bought and sold many times after it was harvested, 
or even before it was taken from the field. Within a few 
months the same particles of matter have been owned for a 
brief period by many different persons residing in many 
different jurisdictions, some of whom may have never seen, 
or been within a thousand miles of, their property. Bread, 
however, is very simple in its composition compared with 



THE PROPORTIONATE METHOD ,93 

clothing and many other things in common consumption, 
the materials of which may have been within a twelve- 
month the property of an incalculable number of persons. 

As it is evidently impossible for the assessors to dis- 
cover all these titles by inspection, personal property of 
this kind is taxed under the general law, like real estate, 
only once a year. Real estate, however, is comparatively 
seldom transferred, and when a sale takes place the rents 
and taxes can be apportioned. The value of the building 
in which a merchant carries on his trade, and that of the 
land on which it stands, can be ascertained by the assessor, 
and by every one else, without very great difficulty. That 
value is nearly the same on every day of the year, and 
varies slowly, as a rule, from year to year. But the value 
of the stock of goods which the merchant has on hand 
cannot be easily ascertained. He can seldom determine 
it precisely himself, although no one else can determine 
it near so well. It is not the same on any two days, nor 
in any two months; and it may be very different on the 
day when the assessor makes his inspection from what it 
is on any other day of the year. Nevertheless the mer- 
chant is usually taxable for its value on that day, while 
the thousand persons who have owned it within a year 
are exempt. It may be presumed that these persons are 
taxed as owners of some equivalent for the property which 
they have sold, but the presumption is very slight. Such 
equivalent, even if at the time open to inspection, may 
have since altogether disappeared. 

For much personal property, although tangible, is evan- 
escent. It comes into being, undergoes many transforma- 
tions, and is consumed within a year. The wheat grown 
from the seed sown in the spring may be eaten before 



94 THE METHODS OF TAXATION 

winter, and if the date of assessment falls in the winter, 
it will not be taxed either as wheat or flour or bread. 
The same is true in various degrees of the other cereals, 
of fruits and flowers, of fuel, and of everything which 
is used up in satisfying human wants and purposes. The 
milk of a cow during a year may amount to 3,000 quarts, 
and be worth $200; but neither the dairyman, the milk- 
dealer, nor the consumer, all of whom have owned the 
milk, may be taxed for his ownership therein. As the 
general property tax is commonly assessed, only the most 
bulky and durable objects are actually subjected to inspec- 
tion; and objects of the greatest value, such as jewels, al- 
though durable and intended especially for display, do 
not fall within the assessor's range of vision. 

The difficulty of the assessors' task is very greatly in- 
creased by the division of our country into states that are, 
so far as taxation is concerned, mutually independent. 
The dates fixed for the valuation of property vary in the 
different jurisdictions, so that a carload of wheat might 
be moved through four or five states and escape taxation 
in every one of them; or, if its movements were properly 
timed, it might be taxed in all of them. The farmer who 
produced the wheat may have exchanged it for a carload 
of fertilizer, which might experience the same vicissitudes. 
According to the judgment displayed in managing such 
transfers - — and the case supposed is by no means merely 
hypothetical — the value of the goods may be very con^ 
siderably reduced or enhanced. We accordingly observe 
great activity in the movement of merchandise out of a 
state as the date of assessment approaches, while imports 
appear to be stimulated so soon as this date is passed. It 
is obvious that the owners of this merchandise do not 



THE PROPORTIONATE METHOD 95 

intend to be taxed on what they have received, or are to 
receive, from its sale. Were they to be so taxed, the mo- 
tive for hurrying the export would not exist, and the 
presumption is that neither the goods exported, nor those 
for which they are exchanged, are subjected to taxation. 
Similar activity in the transfer of money and deposits in 
banks takes place as the date of assessment approaches; 
capital being actually removed from the state, or employed 
in the purchase of securities exempt from taxation. Riches 
often have wings, and at the stroke of a pen may be made 
to fly to the uttermost parts of the earth. 

But if the assessment of tangible personal property is 
difficult and incomplete, that of intangible property is 
frequently altogether impossible. Such property cannot 
be perceived by the senses, and the knowledge of its ex- 
istence may be confined to very few persons. In certain 
cases its existence is made apparent by public records, 
but most claims and credits are known only to the parties 
concerned. A minute and inquisitorial examination may 
sometimes enable the assessor to assign a correct value to 
the goods of a merchant; but no inspection within his 
power will inform him of the extent of the claims which 
the merchant has on the property of others, or of those 
which others have on his property. Some paper evidences 
of obligations may be discovered, to which there are no 
offsets, but such discoveries are not likely to be very ex- 
tensive unless the owner of the claims lends his aid; and 
the number of small claims evidenced by no written obli- 
gation is in the aggregate enormous. 

The modern practice of carrying on business with bor- 
rowed capital, commonly spoken of as the credit system, 
has made personal property rights far more intricate than 



96 THE METHODS OF TAXATION 

they were originally, and has correspondingly increased 
the difficulty of assessing them for taxation. The function 
of credit is, to the eyes of the ordinary observer, com- 
pletely disguised by the employment of money; but it 
is demonstrable that in most of the operations of produc- 
tion and exchange, what is borrowed is, in the last analy- 
sis, something material. This tangible capital, however, 
is the basis of a number of credits. The person who owns 
it lends it to another; or, what is the same thing, gives 
him an order that will insure him its possession. But 
this order may be transferred by the first borrower, or 
he may pledge it as security for another loan from a dif- 
ferent lender, and the process may be indefinitely extended. 
The tangible capital, meanwhile, may never leave the pos- 
session of the original owner, and he may be repaid 
eventually by the confirmation of his possession. But so 
long as his order is outstanding, his property in this 
capital is only nominal ; the right to it is elsewhere, per- 
haps in many unknown hands and evidenced by many 
instruments of credit. On the other hand, the lender may 
deliver the capital when the loan is originally made, and 
never demand its return. He may be satisfied with the 
promise of the borrower, and this promise he may lend, 
or on its security he may borrow. 

The nature of this complicated process may be illus- 
trated by an example. A merchant may borrow a thou- 
sand dollars from a bank, pledging the bond of some cor- 
poration for the same amount as security. The bank thus 
acquires a right of property either in the other possessions 
of the borrower, or in the btfnd, or in both. The borrower 
acquires „a right of property in the possessions of the bank, 
as he does not remove the thousand dollars from its cus- 



THE PROPORTIONATE METHOD 97 

tody, but accepts an order for them in the shape of a 
credit in his account. There has been no addition to the 
tangible wealth of the community; but, in the eye of the 
law, personal property has increased by the sum of a 
thousand, or two thousand dollars, and in many states 
such property is taxable. Nor does the transaction, so 
far, increase the wealth either of the bank or the customer, 
since it amounts merely to balancing one claim against 
another, the interest on the bond being assumed to equal 
the interest on the loan. But the bond is evidence of a 
property right, and is taxable, and so are the thousand 
dollars in the possession of the bank. This thousand dol- 
lars may itself be nothing but the paper promise of the 
government to pay that sum, secured by the wealth of the 
whole people, on which they are taxed; and the bond 
may be secured by the pledge of the stock of another 
corporation. This also is in many cases taxable personal 
property, while the tangible possessions of the corporation 
are also taxed. Thus, on the basis of material wealth 
having a value of a thousand dollars, there have been 
created personal property rights having ten times that 
value in the view of the law, which accordingly subjects 
them to taxation. 

The fact that such rights are extensively created no 
doubt proves that some economic gain results from their 
creation. But it also proves that the law is not enforced, 
for no conceivable gain from such transactions would come 
near to make up for the loss from taxation, were the tax 
actually paid. In the ordinary course of business, no one 
borrows who does not expect to make a profit by doing so, 
after paying interest on the loan; but the current rate 
of profit is far from sufficient to pay the rate of taxation 

7 



98 THE METHODS OF TAXATION 

nominally current on personal property. Since the tangible 
property which is the basis of numberless credits is taxed 
at this rate, it seems impossible to tax all the credits at 
the same rate; and whether possible or not in theory, it 
is evident that in practice most of these credits must 
escape the observation of the assessor. 

That these conclusions are correct seems to be demon- 
strated by the records of the financial markets. A very 
large part of personal property of the intangible kind 
consists of claims evidenced by bonds for the payment of 
money, and many of these bonds are openly bought and 
sold on the exchanges, their prices being regularly quoted. 
Some of these bonds, as those of the United States, are, 
by the terms of the law authorizing their issue, exempt 
from taxation everywhere in this country; many others 
are exempt within more or less limited jurisdictions. 
Owing to certain provisions in the currency laws, govern- 
ment bonds have for banks a quite exceptional value, the 
extent of which, however, is so difficult to determine pre- 
cisely as to make it unsafe to use the price of these bonds 
in drawing our inferences. Other non-taxable bonds, how- 
ever, sell at prices not much higher than those of taxable 
bonds of approximately equal security. The income de- 
rived from a first rate bond, if the ordinary tax on it 
were paid by its owner, would often be no more than half 
that derived from an untaxed bond ; but the market values 
of such bonds may not differ more than a fraction of one 
per cent. Eo doubt many bonds are held by institutions, 
such as savings banks, not liable to taxation upon them; 
but the quantity in the possession of individuals is enor- 
mous. The quantity, however, found by the assessors 
to be in such possession is very trifling. Men who hold 



THE PROPORTIONATE METHOD 99 

such securities in trust are aften subjected to taxation. 
Men who hold them as their own property evidently, as 
a rule, have no intention of paying taxes on them. They 
are sometimes compelled to do so, in spite of their in- 
tentions; but the prices which these securities steadily 
command show that such payments are exceptional. 

While it is evident that inspection fails to discover the 
ownership of much personal property of this description, 
it is impossible to ascertain the extent of the failure. 
Even if it were practicable to learn the rate of taxation 
in every taxing district, it would be of little service, be- 
cause the assessed value of property has no determinable 
relation to its market value. By comparing a number of 
places, we may perhaps obtain an average rate, but we 
can only conjecture it to be generally prevalent. In some 
places the rate of taxation is much less than one per cent ; 
in others it is three or four times as much. It is prob- 
able that where the rate of taxation is very low, a greater 
proportion of bonds is taxed than where it is high; but 
we know that rich men generally reside in cities where 
a low rate of taxation seldom prevails. Bonds issued by 
well-known corporations are frequently scattered through 
all the states, and large numbers of them are owned in 
foreign countries. The value of bonds so owned would 
not be much affected by the fact that they were free from 
taxation in the state where they were issued. 

In many communities assessors make no attempt to 
discover the owners of this kind of property, and if a 
bond is practically untaxed, its value would be little in- 
creased were it exempt by law. It might seem that some 
definite conclusion on this point could be reached by as- 
certaining the amount of bonds actually extant, and com- 



100 THE METHODS OF TAXATION 

paring it with the amount of personal property of this 
kind returned by the assessors throughout the country. 
Were it possible to obtain trustworthy figures, which it 
is not, such an investigation would be inconceivably labori- 
ous, and it would be vitiated by our inability to discover 
the extent of foreign ownership. It would be futile, also, 
because of the great quantity of bonds held by numberless 
institutions exempt from taxation, for whom non-taxable 
bonds have, of course, no peculiar value. 

We have so far referred chiefly to bonds made payable 
to bearer and transferable by delivery. These bonds are 
issued almost exclusively by corporations, they usually 
have many years to run, and they are practically the only 
bonds dealt in on the exchanges. But the value of bonds 
made chiefly by individuals, for relatively short periods, 
and payable to specified persons, is collectively enormous. 
As these bonds are almost invariably secured by mortgages 
of real estate, they are, under our system of making title 
to land depend on record, necessarily registered. It fol- 
lows that when a mortgage is made to any one residing 
within the registration district, the assessors may be able 
to discover the owner of the bond by a mere inspection of 
the record. But when the mortgage is made to a non- 
resident, and especially when the mortgagee resides in an- 
other state, it seldom happens that the assessors where he 
resides discover this record, nor are they often able to 
carry on investigations outside of their jurisdiction on the 
chance of occasionally making such a discovery. The 
method of inspection leads to great inequalities in the 
assessment of all kinds of intangible property, but in the 
case of mortgage bonds of this description the injustice is 
peculiarly aggravated. It is probable that persons residing 



THE PROPORTIONATE METHOD 101 

where real estate is situated will be better able than non- 
residents to judge of its value, and will therefore be more 
willing to lend on its security. But this method of taxation 
discriminates against such loans, and thus compels bor- 
rowers to seek accommodation in other places. On the 
other hand, residents are under a strong inducement to 
invest their capital elsewhere; an inducement to which 
they yield to a notorious extent, although with frequently 
disastrous results, as many residents of the Eastern states 
can testify. 

This inequality is still further aggravated by the fact 
that property held in trust for helpless and incompetent 
persons is usually required by law to be invested within 
particular jurisdictions, and is thus more open to the in- 
spection of the assessors. The accounts of executors and 
trustees are to a considerable extent matters of record, and 
as the property which they administer is frequently di- 
rected by testators, and practically also by the laws regu- 
lating trusts, to be invested in bonds made by individuals, 
all their transactions may be examined. When estates are 
settled, it is often necessary for executors to take bonds 
secured by real estate situated where they reside, and such 
bonds can seldom escape taxation. As they are assessed 
at their face value, while real estate is generally assessed 
at much less than its market value, the rate of taxation 
frequently amounts to one half of the rate of interest which 
the bond bears, and sometimes to the whole of it. Cases 
of extreme hardship to lunatics, infants, and widows can 
hardly fail to arise under such circumstances, and they 
are in fact of frequent occurrence. It must be admitted, 
therefore, that the general property tax, so far as it de- 
pends on the inspection of assessors, is assessed with the 



102 THE METHODS OF TAXATION 

greatest inequality, and falls with exceptional severity on 
those who are least able to bear it. 

Such inequality has naturally attracted much attention, 
and its effects have been repeatedly investigated. The 
amount of evidence thus accumulated is enormous, and it 
would be quite impracticable even to enumerate the re- 
ports that have been made. As the conditions disclosed are 
very much the same in the different states, we may take 
for illustration the results presented by a special commis- 
sion appointed by the General Assembly of Connecticut. 
Although this report was made in 1887, later inquiries in 
Connecticut and elsewhere have shown that the same con- 
ditions still exist. So long ago as in 1844 a legislative 
committee reported that more than one third of the per- 
sonal property owned in the state paid no taxes. This 
opinion was based in part on comparisons made between 
the inventories of the estates of decedents returned to the 
Probate Courts, and the tax-lists of the same persons for 
the year preceding their decease. Adopting the same 
method, the later commission selected six Probate Dis- 
tricts, each in a different county, and subjected some five 
hundred estates to careful scrutiny. In one of these dis- 
tricts the amount of taxable property inventoried was about 
$7,000,000, while the amount appearing on the tax-lists of 
the same persons was $1,581,000. It would seem that in 
this district 77 per cent of the taxable property was 
untaxed; in other districts the percentage ranged from 
45 to 80. A part of the discrepancy, however, is explained 
as due to the fact that real estate is generally inventoried 
at a higher valuation than that of the assessors. Making 
allowance for this, it would seem that at least one half of 
the personal property passing through the Probate Courts 



THE PROPORTIONATE METHOD 103 

had not been taxed while the owner was living. In some 
other states tax commissioners have estimated that three 
fourths of all personal property is not taxed. 

Further inquiry in Connecticut proved that such per- 
sonal property as paid taxes at all was chiefly of a tangible 
nature. Deducting such property, as well as the capital 
stock of moneyed corporations, all the intangible property 
in the state was found to be but four per cent of the 
grand list. There are 167 towns in the state, and in 
81 of them not a single bond was assessed for taxation. 
Meriden is a considerable town ; but no bonds were listed 
there. Waterbury is thought to be a rich city; but its 
citizens appeared to possess bonds only to the amount of 
$750. Some of the financial officers of the general gov- 
ernment are fond of computing the amount of money in 
circulation in the country. In 1885 this was declared to 
be about $23 per caput, and the share of Connecticut 
(which, however, must have been far greater than the 
average) would have been perhaps $16,000,000. But, 
according to the assessors' returns, the money in possession 
of the people of that state was but $1,100,000, and in 
forty-three towns, some of them not unimportant, there 
was no money at all. Taking the items of bonds, notes, 
money at interest, and cash, it appears that while in 1855 
they had amounted to $19,186,000, and in 1865 to $20,- 
521,000, they had fallen in 1885 to $13,208,000. In view 
of the enormous investments during this period in rail- 
road and other bonds, and in Western mortgage loans, this 
record is peculiarly impressive. 

For it is to be observed that these results took place 
while the method of disclosure as well as that of inspection 
was in use. Taxpayers seem to have been always required 



104 THE METHODS OF TAXATION 

to make out lists of all their property, and since 1850 have 
been obliged to swear to the truth of these lists. In addi- 
tion to the penalty of perjury, forfeiture of goods has been 
resorted to; 1 but conviction for perjury of this kind is 
unheard of, and the forfeitures have been extremely in- 
significant in amount. The amount of intangible property 
returned for taxation does not appear to be affected, 
whether the law makes a false return punishable as per- 
jury or not, nor does the dread of confiscation appear to 
have any strength as a motive. Making due allowance for 
intangible property disclosed by the accounts of trustees, 
it seems hardly too much to say that very few owners of 
such property in Connecticut are not guilty of false swear- 
ing in making out their lists. Such matters are too deli- 
cate to be discussed in public, but in private conversation 
the resort to such practices, while it may be deplored, is 
regarded as a necessary mitigation of the inequality created 
by the law. 

1 Early in the eighteenth century the law declared that the rateable 
value of unlisted property should be confiscated, half of it going to the 
inspectors, half to the colony. This method was soon abandoned, and a 
fourfold rate of taxation imposed on omitted property, half of which 
valuation went to the assessors. This was the law for over a century, 
but the additions made were so inconsiderable as to average less than 
$30,000 in the whole state. In 1821 this valuation was made threefold 
instead of fourfold, the assessors getting no part of it ; but this penalty 
proved entirely ineffectual, and was abolished in 1851. In 1865 a pen- 
alty of ten per cent for not returning a list was imposed, and in 1882 this 
was made progressive, ten per cent being added every year; but in 1885 
the progressive feature was repealed. 

In 1890, a law was passed for a special purpose, and without any idea 
of reforming the practice of taxing personalty. But the terms of the law 
were general, and authorized any person to report to the State Treas- 
urer any bonds, notes, or other choses in action in his possession, and to 
pay a tax on them at the rate of one-fifth of one per cent a year in place 
of other taxes. To the surprise of the legislature, many millions of con- 
cealed securities were presently disclosed, the owners presumptively 
calculating that it was not worth while to commit perjury to save two 



THE PROPORTIONATE METHOD 105 

Another conclusion, of much practical importance, is 
to be derived from these facts. It is that while men will, 
as a rule, in the sworn returns which they make to the 
assessor, declare the value of their own property to be less 
than it is, they seldom make such false statements con- 
cerning the property which they hold in trust for others. 
This is partly because they have not the same induce- 
ment of personal gain; for they have little direct profit 
in relieving the property of their wards from taxation. 
But it is chiefly due to the fact that trustees are compelled 
for their own protection, as well as formally required by 
law, to keep accurate accounts of their proceedings. These 
accounts are not only subject to the inspection of the per- 
sons interested, but must also, in many cases, be recorded in 
local offices, or returned to state departments. As private 
trustees are seldom allowed to employ the funds committed 
to their charge in active business, their accounts are com- 
paratively simple, and state the value of the funds clearly, 
or so that it can be easily ascertained. For most trustees, 
therefore, the objections to making false returns are very 
serious, and, as appears from the records in Connecticut 
above referred to, they cause executors to disclose the ex- 
istence of much concealed property. The method of dis- 
closure is thus available in the case of those whose prop- 
erty is not in their own name, chiefly because it can be 
supplemented by the method of inspection. 



mills of interest. The value of securities so registered has ranged from 
$20,000,000 to $40,000,000 a year. In 1897 the legislature, reasoning 
that twice the revenue might thus be obtained, doubled the tax; but, 
as this calculation proved incorrect, it is probable that many persons 
thought it better to conceal their property than to pay a tax of two-fifths 
of one per cent upon it. A similar law in Maryland has had equally re- 
markable results in causing concealed property to be added to the lists. 



106 THE METHODS OF TAXATION 

Attempts have been made in some states, as in Massa- 
chusetts, to enable the assessors in certain taxing districts 
to obtain the information available to assessors elsewhere. 
Thus when a taxpayer removes from one community to 
another, a list of his possessions may be transmitted to his 
new residence. State assessors may also compare the re- 
ports of the local assessors and other records for the pur- 
pose of enforcing correct returns. Lists of stockholders in 
various corporations may also be examined by state as- 
sessors, so that the owners of stock may be reported to 
local assessors for taxation. But as there is no way of 
inspecting claims and rights to property without the limits 
of the state, these attempts cannot bring about any equality 
of taxation. Owners of claims enforceable within the state 
may be more frequently taxed, but this would tend rather 
to aggravate than to remove the inequality. The induce- 
ment would be all the stronger for those who have money 
to lend, to lend it without the state, and borrowers would 
find it all the more difficult to obtain accommodation at 
home, where it would normally be provided. It may some- 
times happen that nonresident lenders send their money 
into a state to be loaned, for the same reason that resident 
lenders send their money out of it, and that the two move- 
ments are of equal volume. In such event the loss to in- 
dividual borrowers might be comparatively trifling, al- 
though the aggregate expense of this circuitous method of 
extending credit would be considerable. But there are 
differences between neighboring states, both in their tax 
laws and in the ways in which they are applied, which 
renders it impossible to do more than conjecture as to the 
extent of such movements. It admits of no question, how- 
ever, that all attempts to apply the general tax to intangible 



THE PROPORTIONATE METHOD 107 

property by the method of inspection necessarily result in 
such a distribution of burdens as is unequal in the extreme. 

The fact that much intangible property escapes the ob- 
servation of the assessors has induced the legislators in 
some states to resort to the odious practice of employing 
spies and informers, who are rewarded from the taxes on 
the property which they add to the assessment lists. This 
practice was in former ages generally adopted by despotic 
rulers, who empowered such persons as contracted to col- 
lect the revenues to use whatever methods they found most 
efficacious. These persons agreed to pay specified sums to 
the rulers, and compensated themselves with the additional 
amounts which they extracted from the subjects. Under 
this system extortion flourished, and the distress which it 
caused to the common people was one of the chief causes 
of the French Revolution. We read that Voltaire, being 
in a company where it was proposed that every one should 
tell the most horrible story of human oppression that he 
knew, when his turn came, merely said : " There was once 
a farmer general of the revenue." The government of the 
United States, not many years ago, authorized the payment 
to informers of a moiety of the customs duties recovered 
through their labors, but the practice was attended with 
such scandalous corruption that it had to be modified to 
some extent. Spies are still employed by that government 
to aid in the collection of these duties, but they are at- 
tached to the revenue service, and are partly, at least, 
compensated with regular wages. 

It might seem that such practices had been sufficiently 
condemned by experience, but they have been revived in 
recent years by several of our legislatures. It has long 
been the law, in the State of Ohio, that taxpayers should 



108 THE METHODS OF TAXATION 

make out lists of their personal property and verify them 
by oath, their assessments being increased one half in case 
of their failure to comply with the statute. The assess- 
ments of personal property under this statute being as un- 
satisfactory as the experience of other states indicated that 
they would be, about 1880 the practice of employing in- 
formers began to be authorized by the legislature, and in 
1888 the officers of every county were empowered to con- 
tract with such persons, their compensation not to exceed 
one fifth, or in some cases one fourth, of the sums recov- 
ered through their activities. The county auditor was also 
to receive a commission of five per cent on these collections. 
These statutes are said to have been enacted through the 
influence of certain persons who at once made contracts 
wrth the authorities in many counties, and proceeded to 
organize a bureau of detectives for the purpose of syste- 
matic investigation within and without the state. 

The results of this enterprise, while no doubt highly 
satisfactory to the " tax inquisitors,' ' as they are called, 
seem not to have been especially advantageous to the state. 
The assessed valuation of personal property in Ohio was 
over $535,000,000 in 1875. In 1879 it had fallen to $443,- 
000,000, and in 1882 it rose again to $542,000,000. In 
1888, when the system of farming the taxes was author- 
ized, the valuation was $532,000,000, and it continued to 
rise until 1893, when it was $568,000,000, falling in 1897 
to $511,000,000. There can be no question, however, that 
personal property had increased during this period at a 
very much greater rate than these figures indicate. It is 
not certain that the activity of the inquisitors did not cause 
as much property to be removed from the state as it added 
to the lists, but it is certain that the expense of collecting 



THE PROPORTIONATE METHOD 109 

the taxes increased far more than in proportion to the in- 
creased assessment. It might be expected that the assess- 
ment of intangible property would show a marked increase, 
such property being least apt to be listed. In fact such 
assessments have decreased. The assessed value of credits 
fell between 1888 and 1896 from $111,900,000 to $102,- 
800,000; that of bonds and stocks from $7,400,000 to 
$7,300,000; while money and deposits alone showed an 
increase, the figures being $33,800,000 in 1888, and $34,- 
700,000 in 1896. In Cincinnati, where the inquisitorial 
system was first adopted, the valuation of personal prop- 
erty fell between 1888 and 1897 from $51,500,000 to 
$44,900,000. In Cleveland, a rapidly growing city, this 
valuation increased materially, but at a less rate than in 
the years preceding the employment of the inquisitors. 

Moreover, the assessed value of bonds and stocks more 
than thirty years before 1898 had been over $12,000,000. 
In 1851 the value of money and credits in Hamilton 
County, (Cincinnati), was about $3,293,000; in 1903 it 
was $3,153,350. In 1866 the value of intangible property 
in this county was about $17,460,000; in 1896 it was 
$5,389,350. During that period the amount of money 
fell from $6,778,883 to $1,097,283, the population mean- 
while having more than doubled. In 1903 the deposits 
in banks and trust companies appear to have amounted to 
about $400,000,000, of which about $55,000,000 was re- 
turned for taxation. Of the $70,000,000 on deposit in 
1896 with the banks of Cleveland, $1,741,129 was re- 
turned for taxation. The claim that the terror of the law 
has caused many persons to make returns that they would 
otherwise have omitted seems to be without support. 
Whatever gain may be derived from this source is probably 



110 THE METHODS OF TAXATION 

much more than offset by the removal from the state of 
residents owning large amounts of intangible property; 
nor may we disregard the possibility that immunity may 
be purchased of men who are willing to exercise the office 
of inquisitor; although in ten years they deducted, from 
some $1,600,000 which they collected in two counties, over 
$460,000 as their legal compensation. As the auditors 
of these counties deducted also four per cent, the govern- 
ment received about $1,135,000 of the $1,600,000 exacted 
from the taxpayers. 

Neither the statute of 1885, nor that of 1888, provides 
any safeguard against corrupt dealing by the tax-gatherers ; 
indeed the statute of 1885 did not limit the compensation 
of the inquisitors. It is not necessary to advertise for 
bids, nor to award the contract to the lowest bidder. There 
is no limit to the time for which these contracts may be 
made. The County Auditor, who awards them, and who 
sits as a judge to hear and determine the issues, is di- 
rectly and largely interested in the amount that he finds 
due from the taxpayer. In some cases the amount claimed 
has been $200,000 and over; and if the claim was sus- 
tained the auditor would receive $8,000 or $10,000, and 
the inquisitor $50,000. The opportunities for collusion 
between the auditor, the inquisitor, and the taxpayer are 
very great. Many suits have been brought for large 
amounts, and quietly settled for very small ones. It is 
asserted that large sums have been collected from tax- 
payers, no part of which has reached the treasury. While 
we cannot test the truth of these assertions, it is obvious 
that there is nothing in the law to prevent such practices, 
and everything to encourage them. 

It is safe to say that no recognized principles of justice 



THE PROPORTIONATE METHOD 111 

authorize the employment by government of spies and in- 
, formers who are rewarded out of the taxes which they aid 
in collecting. How far it may be justifiable to offer re- 
wards to informers who secure the conviction of those 
guilty of felonies it is not necessary here to inquire ; but 
the failure to pay a tax is not commonly regarded as an 
offense of such turpitude as needs to be repressed by the 
drastic means employed against murderers and highway- 
men. The testimony of men who use deceit and treachery 
in procuring evidence is always open to suspicion, and is 
especially so when it is for the pecuniary interest of such 
men to have their testimony received. They may profess 
to lie for a good end; but experience has justified man- 
kind in placing little credit in such professions. It is in- 
trinsically probable that men who do not scruple to prosti- 
tute their honor for gain will not be very particular as to 
the quarter from which the gain is received, and this pre- 
sumption has been abundantly justified by experience. 
Informers are frequently bribed by those who dread their 
attacks, even when such attacks would fail if resisted; 
for few men in business can afford to have their integrity 
put in question by a criminal proceeding. As we have re- 
marked, such shocking scandals arose under the " Moiety 
Act," which was passed during the excitement of the civil 
war, as compelled congress to repeal it; and the modified 
system which now prevails is severely condemned by those 
familiar with its operation, because of the corrupt dealings 
which it encourages. So far as any enlightened public 
opinion exists on the subject, it seems, in civil cases at least, 
to disapprove judgments obtained through the testimony 
of witnesses who are paid if their evidence secures k 
verdict. 



112 THE METHODS OF TAXATION 

It may excite astonishment that methods resulting in 
such extreme inequality should ever have been resorted 
to by legislatures, and it is certainly remarkable that they 
continue to be commonly employed. Yet the proposition 
that all forms of property should be taxed alike is a plaus- 
ible one, and when we consider that most of our lawmakers 
are not very familiar with the operation of economic laws, 
or perhaps with fiscal science, it may seem less surprising 
that they endeavor to apply this principle. In order to 
apply it, as we have seen, it is indispensable to ascertain 
the total quantity of property owned by every individual, 
and as this information is generally in the possession of 
the individual owner, and of no one else, the most obvious 
course to attain it is to put the question to the owner di- 
rectly. We accordingly find that this course has been fol- 
lowed from the earliest times and in every part of the earth. 
From the point of view of the ruler> no citizen ought to 
refuse to furnish such information, and attempts to evade 
this duty are properly treated as crimes. In many coun- 
tries, and even under the Roman Empire, torture has been 
used to compel the delinquent taxpayers to disclose their 
hidden property. King John of England, if we may be- 
lieve Roger de Wendover, induced Jews to reveal the 
amount of their wealth by pulling out their teeth, and 
perhaps in some Oriental countries the bastinado is still 
used for similar purposes. Where such views concerning 
the administration of justice prevail, the fact that a law 
is commonly violated is not an argument for its repeal. 
Such violation constitutes an argument for increasing the 
severity of punishment, not for yielding to law breakers. 
It is true that the burdens of those who comply with the 
law are increased by the failure of others to disclose their 



THE PROPORTIONATE METHOD 113 

wealth; but this result is regarded as a consequence not 
of the law but of the perversity of those who disobey it. 1 

This theory of jurisprudence has been largely discred- 
ited by experience. It evidently disregards all distinctions 
between laws. We commonly speak of good laws and bad 
laws, and when a law is believed to work injustice it is 
difficult to persuade men that it ought to be enforced. It 
may sometimes be advantageously enforced for the very 
purpose of creating so much indignation as will cause its 
repeal ; but when its repeal is not proposed by the govern- 
ment, or is positively resisted, the subjects may regard it as 
their duty to disobey. ISTo truth is better established by 
experience than that most men, when in position to exer- 
cise control over others, are irresistibly tempted to use 
their power arbitrarily. The progress of civilization is 
due in great measure to the refusal of subjects to obey the 
unreasonable commands of their rulers. It is the especial 
pride of the English-speaking peoples that the sturdy spirit 
of their progenitors established the rights of subjects on a 
permanent basis, and made clear certain principles of jus- 
tice which no statutes were to contravene. The mere fact 
that a ruler commands is not, to an Englishman, a suffi- 
cient reason why he should obey. The command must seem 
to him to accord with constitutional principles of justice, 
or he may decline to comply with it. No sacrifice may 
seem to him too great if made in defense of the funda- 

1 At a time when distilled spirits were selling in open market for less 
than the amount for which they were taxable, and the returns from this 
excise had very greatly fallen, the Commissioner of Internal Revenue, 
the late David A. Wells, proposed a tax low enough to insure the collec- 
tion of an abundant return. But a representative of New York, Roscoe 
Conkling, declared that he was not ready to admit that the nation which 
had put down a great rebellion at a cost of so much blood and treasure, 
could not collect a tax of two dollars a gallon on whiskey. 

8 



114 THE METHODS OF TAXATION 

mental liberties of his people. If he is commanded to 
abjure his religion, he may choose rather to go into exile 
or to be burned at the stake. If he is ordered to persecute 
others, he may prefer to go to prison. If ship-money is 
levied unjustly, he may, like John Hampden, refuse to pay, 
at the risk of forfeiting his estate and losing his head. If 
a law directs him to return a fugitive slave to his master, 
he may decide to aid the fugitive to escape and defy his 
rulers to prevent him. Laws are not obeyed because they 
are ordained by rulers, but because they are thought just 
by subjects. The law cannot make that a crime in common 
estimation which nature, as Adam Smith says, never meant 
to be such; it cannot effectively punish conduct which is 
not condemned by the moral sense of the community. Our 
government is supposed to represent its citizens; its laws 
are supposed to express the will of the whole people. If 
they conflict with established principles of justice, they 
should not be enforced, but repealed. The true sanction 
is not the legislative fiat, but public opinion. 

Probably most men do not refuse to disclose the extent 
of their ownership of invisible property from any deep- 
seated conviction that resistance to laws subversive of 
morality is a righteous obligation. They may regard the 
enforcement of such laws as of the nature of persecution; 
but persecution, as Leslie Stephen observes, has an ambigu- 
ous influence. " If it sometimes generates in its victims 
a heroic hatred of oppression, it sometimes predisposes 
them to the use of the weapons of intrigue and falsehood, 
by which the weak evade the tyranny of the strong." "No 
doubt this result commonly follows; we cannot be blind 
to the fact that great numbers of men, otherwise law- 
abiding, and in other affairs of unimpeachable integrity, 



THE PROPORTIONATE METHOD 115 

notoriously evade the law by concealment, deceit, and even 
false swearing. While parsimony and meanness may ex- 
plain this in part, we know that many of those persons are 
liberal in their voluntary contributions to public ends. 
Inquiry among them shows that they rebel at what they 
regard as the outrageous inequality of the burdens imposed 
by the law. They are thoroughly convinced that to tax a 
debt, when the property on which the debt is a lien is also 
taxed, is " double taxation." The debt would have no 
value if the debtor had no property ; and if the debtor has 
property, his ownership is really limited by the rights of 
his creditors. This conviction is certainly well founded; 
and, whether well founded or not, it evidently is sincere 
and ineradicable. Nor is this all. The conviction is 
equally strong that a very large proportion of those tax- 
able under such laws do, as a matter of fact, evade them, 
and, in spite of the most severe penalties, will continue 
to evade them. Whoever pays, therefore, pays not only his 
own share but that of the delinquents. Obedience to the 
law is punished, and disobedience rewarded. As a very 
competent expert in taxation, Sir A, West, puts it, one 
man's exemption is another man's taxation ; and when the 
grievance of double taxation is added, it seems impossible 
to deny that the indignation expressed at so great injustice 
is righteous, even if the method of resisting the injustice 
is not. 

The resort to the method of disclosure, or confession, 
implies that the assessor is unable otherwise to ascertain 
the amount of the wealth of the subject. It implies, there- 
fore, that the subject is to act as judge in his own cause, 
and to assess himself. It implies that if the subject does 
not choose to communicate his knowledge to the assessor, 



116 THE METHODS OF TAXATION 

the latter will remain in ignorance. If the subject can con- 
ceal his possessions, they are not likely to be discovered; 
if they were discoverable, the assessor needed not to call on 
the owner. The latter knows that concealment is commonly 
practiced, and that if he does not practice it he will pay the 
taxes of those who do. The requirement of the law appears 
to most taxpayers as so palpably unjust as to amount to 
legalizing robbery; and many of them no more hesitate 
to deceive the assessor than they would hesitate to deceive 
a highwayman. 

It has been the practice in the city of New York to take 
the names of a large number of persons at random, and 
assess them arbitrarily. Nearly half of these assessments 
are erroneous, and are eventually cancelled, the persons 
assessed appearing before the tax-commissioners, and 
" swearing off " their taxes. The loss of time thus caused 
is in the aggregate enormous, and the vexation and annoy- 
ance caused by demands for money which is not due are 
themselves an onerous tax. Many men cannot afford to 
wait for hours in a cue, in order to prove that an unjust 
demand has been made upon them ; it is cheaper for them 
to submit to be robbed when the amount involved is not 
large. Many persons do not understand how to proceed 
in order to have their assessments corrected; many are 
ignorant of the details of the laws, and suppose themselves 
to be taxable for property which is exempt. The govern- 
ment of the City of New York in this manner succeeds in 
obtaining a considerable sum in taxes to which it has no 
right whatever. It occupies the position of a petty pil- 
ferer, who knows that those whom he plunders will con- 
sider that it is cheaper to submit to small depredations than 
to invoke the law to prevent them. Nevertheless, the ex- 



THE PROPORTIONATE METHOD 117 

actions of the government of New York under the general 
property tax are less severe and less unjust than those of 
nearly all the states of the union. 1 

When laws professing to tax all property equally result 
in such extreme inequality, they would seem to be suffi- 
ciently condemned. In fact, the method of disclosure is 
repugnant not only to public opinion but also to the spirit 
of our jurisprudence. Its principle, especially when it 
requires taxpayers to make returns of their property under 
oath, conflicts with a fundamental rule of evidence. This 
rule, proved necessary by very long and painful experi- 
ence, is expressed in the maxim, Nemo tenetur seipsum 
prodere, which is embodied in the fifth amendment to the 
Constitution of the United States. In primitive times, 
when a person accused or suspected of any offense was 
brought before a court, he might be compelled to testify. 
The early jurists apparently reasoned that the accused 
person must know whether he was guilty or not better 
than any one else, and it is certainly natural to make the 
inquiry. Whoever fails to comply with a demand ap- 
parently so reasonable, inevitably creates a certain pre- 
sumption of his guilt. Such refusal naturally arouses in- 
dignation, and disposes men to employ strong measures. 
The most expeditious mode of getting at the truth in such 
cases seems to be to extort confession. Hence various 
forms of torture have been used, not only to overcome the 
reluctance of accused persons to testify, but even to induce 
witnesses to speak the truth. Practices of this kind still 
prevail among savages, and they have not quite disap- 



1 The evidence on this subject is so voluminous that it is impossible 
in a work of this character even to summarize it. Many particulars, 
however, will be found in Appendix A. 



118 THE METHODS OF TAXATION 

peared from the jurisprudence of the most enlightened 
nations. The celebrated Dreyfus case called the attention 
of the world to the powers of French judges in extracting 
admissions from the accused; and the inferior officers of 
justice in English-speaking communities frequently yield 
to the temptation to employ measures which, although 
illegal, may frighten the guilty into confession. Such 
practices are constantly resorted to in that crude form of 
administering justice which we know as Lynch law, and 
it has been found necessary to prohibit legislatures from 
applying their principle by constitutional restraints. 

The irrationality of such methods in criminal procedure 
has often been exposed. According to Blackstone, the 
Civil Law assigned as a reason for using the rack to ex- 
tort confession from persons accused of crime, that " the 
law cannot endure that any man should die upon the evi- 
dence of a false, or even of a single witness, and therefore 
contrived this method that innocence should manifest itself 
by a stout denial, or guilt by a plain confession." The 
theory of the procedure is more effectively laid bare by 
Beccaria, who offers the problem : " The force of the 
muscles and the sensibility of the nerves of an innocent 
person being given, it is required to find the amount of 
pain necessary to make him confess himself guilty of a 
given crime." Most enlightened jurists have concurred 
in the view that truth is not likelv to be attained by com- 
pelling witnesses to testify through torture, and Cicero's 
condemnation of the practice is as emphatic and complete 
as that of any modern writer. 1 But while the correctness 

1 Tamen ilia tormenta gubemat dolor, moderatur natura cuj usque 
turn animi turn corporis, regit quaesitor, flectat libido, corrumpit spes, 
infirmat metus, ut in tot rerum angustiis nihil veritati loci relinquatur. 
Cicero, Pro. Sulla, 28. 



THE PROPORTIONATE METHOD 119 

of this view is admitted in the case of persons charged 
with crime, this is not true, at least to the same extent, 
in other judicial proceedings. ~No objection, perhaps, exists 
to compelling disinterested witnesses to testify, but when 
they are interested pecuniarily in the result, the problem 
becomes far from simple. On the one hand, justice can- 
not well be administered if those who have information 
concerning a matter in dispute refuse to communicate 
their knowledge. On the other hand, if all persons be- 
lieved to have such information are threatened with punish- 
ment if they refuse to testify, there is danger that the 
motives which lead them to refuse, will, if overpowered 
by the dread of punishment, lead them to testify falsely. 

The practice of administering oaths in judicial pro- 
ceedings seems to have been devised to overcome this dif- 
ficulty. This practice has existed from the earliest times, 
and was intended to supplement the terrors of human 
punishment with the dread of the vengeance of the gods. 
It is probable that in a primitive age the fear of such 
vengeance may have frequently operated to deter men 
from false swearing, although historians have preserved 
for us many picturesque details of the perennial elasticity 
of the human conscience. But the maxims of the Civil 
Law prove that present advantage was sometimes found 
to be a more powerful motive than fear of retribution in 
a future life. Nullus idoneus testis in re sua intelligitur 
is the statement in the Digest, and the same rule is laid 
down in the Code. It is within the memory of living 
men when the principle of our Common Law, forbidding 
parties to the record in a civil action to testify, was abro- 
gated ; not so much, perhaps, because the theory that par- 
ties would testify falsely in their own behalf was thought 



120 THE METHODS OF TAXATION 

to be erroneous, as because it seemed on the whole easier 
to get at the truth after hearing the parties give their 
respective versions of the facts. Certainly, in the opinion 
of the older judges and writers on the law, witnesses whose 
interests were affected were not generally restrained from 
falsehood by their oaths. It has been laid down that will- 
ingness to testify in such a case is of itself a ground for 
distrusting a witness, and that " it can be no injury to 
truth to remove those from the jury whose testimony may 
hurt themselves, and can never induce any rational be- 
lief." " It is not to be presumed," said Chief Justice 
Tindal, " that a man who complains without cause, or 
defends without justice, should have honesty enough to con- 
fess it." Interested witnesses, therefore, " the law removes 
from testimony, to prevent their sliding into perjury." 

A distinction obviously exists, however, between the rule 
which disqualifies a man from being a judge in his own 
cause, and that which forbids him to be a witness therein. 
The latter rule was modified because of the extreme in- 
convenience which it was found to occasion, and not from 
any conviction on the part of judges that the veracity of 
mankind had been underestimated. The ability of jury- 
men to weigh testimony has undoubtedly increased, and 
it seems on the whole advantageous to allow litigants to 
give their respective versions of the matter in dispute, and 
to let the jury accept the account which appears the more 
probable. The fact that the parties make oath to the 
truth of their statements has nowadays, in many jurisdic- 
tions, no great weight with the court. The employment 
of compurgators in the wager of law, where each party 
brought his friends into court to swear that he was telling 
the truth, may be referred to as proving the importance 



THE PROPORTIONATE METHOD 121 

of the oath in securing veracity. But however this may 
have been in a superstitious age, it will not be contended 
now by those familiar with litigation, that either parties 
or witnesses are kept from falsehood by fear of punish- 
ment in a future life. Very many persons will not bear 
false witness ; but it is not because they apprehend eternal 
damnation, or, in many cases, because they stand in awe 
of the penalty for perjury. On the other hand, it is un- 
questionably true that many persons will testify falsely 
when they are satisfied that they cannot be, or will not 
be, convicted of perjury; and they will often do this to 
obtain a comparatively insignificant advantage. 

The wisdom of compelling parties to testify under oath 
is more doubtful than that of permitting them to do so. 
This practice came into vogue under the Civil Law, but 
the Common Law did not usually, as Blackstone says, 
reduce the defendant, if in the wrong, to the dilemma of 
either confession or perjury. 1 On some accounts it is 
unfortunate that the practice in Chancery, derived from 
the Civil Law, has now become general in our courts, 
parties being compelled to verify their pleadings under 
oath. As there would ordinarily be no occasion for plead- 
ings unless the parties contradicted each other, one of 
them must be guilty of swearing to what is untrue. Noth- 
ing is so rare, however, as for a person to be prosecuted 
for perjury of this kind, or indeed of any kind. It is 
difficult to believe that pleadings would be less veracious 



1 It is true, however, that the sentence of peine forte et dure was in- 
flicted on those who refused to plead to certain charges, as we know from 
the fate of some heroic men who suffered this horrible punishment in 
order to save their estates for their children; their course preventing 
the jury from finding a verdict, which was, in some cases, a necessary 
condition of forfeiture. 



122 THE METHODS OF TAXATION 

if unverified, and the practice of requiring oaths in all 
manner of proceedings, and on most trivial occasions, has 
become an almost meaningless formality. Many of the 
statutory requirements, indeed, cannot be complied with 
strictly, and their existence tends, by promoting contempt 
for judicial oaths, to impair the regard for veracity in 
other transactions. Beyond question, men do not, in many 
cases, regard that as seriously wrong which the law re- 
gards invariably as a felony. To bear false witness against 
a neighbor is universally odious, and is perhaps not a 
very common offense. To testify falsely in behalf of a 
friend is less severely condemned, and is of comparatively 
frequent occurrence. To swear to what is untrue in dis- 
putes concerning property is evidently regarded as a venial 
sin, and one to which men are so prone that in some cases 
the law refuses to listen to witnesses. Thus no one is 
allowed to establish a claim against the estate of a dead 
man by swearing to communications had with the de- 
cedent, and the Statute of Frauds and Perjuries excludes 
oral testimony concerning a large class of transactions; 
although doubt has been felt whether the statute does not 
cause more perjury than it prevents. 

Thus, in spite of the modifications which the Common 
Law has undergone, it is still reluctant to admit the tes- 
timony of interested witnesses, and to compel that of 
witnesses who are liable to suffer for testifying. One may 
call his adversary as a witness; but, if he does, he may 
not contradict him, and the privilege is thus not likely 
to be abused. And while witnesses, and even parties, are 
required to give evidence in civil actions, although they 
may thereby prejudice their pecuniary interests, the law 
has everywhere adopted the rule in Equity that no one 



THE PROPORTIONATE METHOD 123 

shall be compelled to make a disclosure which may expose 
him to a penalty, or anything in the nature of a forfeiture. 
This rule has been so often approved by the courts as to 
make it impracticable even to enumerate authorities. It 
will be sufficient to refer to one case, decided in the 
Supreme Court of the United States, where the justice 
of requiring a person to furnish evidence against himself 
was directly at issue. 1 The case arose under a statute 
requiring a person, charged with failing to pay certain 
taxes, to produce such of his books and papers as were 
demanded by the government, or else to have the charges 
of the prosecution taken as confessed. It was contended, 
in the defendant's behalf, that this was not only tantamount 
to compelling him to testify against himself, but was also 
equivalent to a search and seizure, because it would effect 
the sole object and purpose of search and seizure; and 
that it would be an unreasonable search and seizure, within 
the meaning of the Fourth Amendment of the Constitution. 
There is no English precedent for such a law, for even 
the act under which the obnoxious writs of assistance were 
issued, in the reign of Charles II, only authorized the 
search for and seizure of goods on which the government 
had a lien for taxes. The practice of issuing these writs 
of assistance to revenue officers was pronounced by James 
Otis, in 1761, to be " the worst instrument of arbitrary 
power, the most destructive of English liberty, and the 
fundamental principles of law, that ever was found in an 
English law-book." In Lord Camden's celebrated dis- 
cussion of the right of search, he stated principles which 
have ever since been recognized in England, and which 
were built into the foundations of American Government. 

1 Boyd vs. United States, 116 U. S. Rep. 621. 



124 THE METHODS OF TAXATION 

He declared that there was no law justifying an entry on 
private property for the purpose of inspecting or seizing 
the owner's papers. He pointed out the difference be- 
tween such a trespass and the search for stolen goods — 
where the owner of the goods is allowed, on his oath of a 
theft and that his goods are at a certain place, to have 
a search warrant for that place, on condition that he be 
present at the execution of the warrant in order to iden- 
tify his property. As to the " argument of utility," that 
such a search is a means of detecting offenders by dis- 
covering evidence, Lord Camden observed, " It is very 
certain that the law obligeth no man to accuse himself; 
because the necessary means of compelling self-accusation, 
falling upon the innocent as well as the guilty, would 
be both cruel and unjust; and it would seem that search 
for evidence is disallowed upon the same principle." 

The principles of this judgment, Justice Bradley, pro- 
nouncing the opinion of the Supreme Court of the United 
States, declared to be of the essence of constitutional lib- 
erty and security; and he observed that the men who 
framed and adopted the Fourth and Fifth Amendments 
relied on the language of Lord Camden as expressing the 
true nature of the rights of freemen. By the judiciary 
act of 1789, the production of papers by parties to an 
action at law was authorized only in cases where it might 
have been required by the rules of Chancery. But 
Chancery never required a party to make any disclosure 
under oath, or to produce any paper, if the effect would 
be, or even might be, to tend to prove him guilty of a 
crime, or to subject him to anything of the nature of a 
forfeiture of his property. The revenue act of 1874, under 
which the prosecution took place, while it expressly ex- 



THE PROPORTIONATE METHOD 125 

eluded criminal proceedings from its operation, embraced 
civil suits for penalties and forfeitures. It was not within 
the literal terms of either the Fourth or the Fifth Amend- 
ment, but the Supreme Court held that it violated the spirit 
of both of them. The fact that the result of the proceed- 
ing might be to subject the defendant to fine or imprison- 
ment or forfeiture of goods, made the proceeding criminal 
in its nature, although it was civil in form. The compul- 
sory production of papers was held to be an unreasonable 
search and seizure, within the meaning of the Fourth 
Amendment, and it was also held equivalent to compelling 
the defendant to be a witness against himself, within the 
meaning of the Fifth Amendment. The opinion in this 
case showed also that the purpose of these amendments 
could not be evaded by making the proceeding for for- 
feiture in rem instead of in personam. Goods cannot be 
forfeited without some breach of the law by their owner. 
As was said by Chief Justice Vaughn : " Goods, as goods, 
cannot offend, forfeit, unlade, pay duties, or the like, but 
men whose goods they are." For the same reason, the 
suggestion that the owner might be cited as a witness in 
a proceeding to condemn his property was rejected. 

Although statutes commanding the owners of property 
to disclose all that they own to the assessors may not be 
held unconstitutional, those which provide forfeitures or 
penalties when property taxable, but previously untaxed, 
is thus discovered, seem to be clearly so. Even in the 
former case there is practically a forfeiture, owing to 
the fact that the burden of those who comply with the 
statute is increased by the delinquency of those who do 
not, to say nothing of double taxation. Moreover the 
considerations which have led to the incorporation of the 



126 THE METHODS OF TAXATION 

rule in our fundamental law are peculiarly forcible when 
taxation is involved. In a dispute concerning property, 
the issue is commonly between two individual claimants. 
Where it is a question of taxation, the interest of an 
individual is opposed to that of all the members of the 
community, represented by the tax-gatherer. A false 
statement in the former case may cause direct and disas- 
trous loss and suffering to a fellow creature ; in the latter 
case it may be impossible to prove that a false statement 
will perceptibly lessen the comfort or happiness of any 
human being. It is obvious that the degree of moral 
turpitude is much greater in the former case than in the 
latter. A man who is tempted to testify falsely may be 
deterred by the reflection that he will rob another of what 
justly belongs to him; but when the loss is distributed 
in infinitesimal portions among thousands or millions, 
this consideration has little weight. It is only necessary, 
in proof of the existence of this distinction in the ordi- 
nary morality, to refer to the attitude of travellers when 
subjected to the inquisition of the custom house. The 
number of those who conscientiously endeavor to pay in 
full the taxes prescribed by law is notoriously small, and 
the traveller who professes any such intention is apt to 
be looked upon as a hypocrite. The same insensibility 
prevails in the relations of the public to property invested 
in corporations. To obtain transportation on a railroad 
without paying for it is obviously a wrong to the stock- 
holders; but as they are unconscious of the wrong, any* 
one who declines to " ride on a pass " on moral grounds 
is thought quixotic, and many persons do not hesitate to 
evade paying their fares if they find that they can do 
so without detection. 



THE PROPORTIONATE METHOD 127 

The attitude of our government, in compelling travellers 
entering the country to make oath to the quantity and 
value of all their belongings, has been peculiarly unreason- 
able. If it complied with the ordinary rules of evidence, 
it would be bound by the testimony of the witness that it 
called, and would be obliged to accept the valuation that 
he put on his property. Such a course, however, would 
undoubtedly illustrate the wisdom of allowing no one 
to be a judge in his own cause. Few persons who have 
landed at the port of New York will maintain that their 
fellow passengers would generally declare to the customs 
officer the nature and value of their goods, if they were 
assured that no inspection was to take place; the revenue 
derived by the government from this source, always in- 
significant, would perhaps disappear altogether. Instead 
of observing this rule of evidence, therefore, the govern- 
ment has exercised the prerogative of calling witnesses 
whose testimony it will accept as conclusive when in its 
favor, and will repudiate when not; a procedure not 
much more reasonable than that formerly employed in 
trials for witchcraft. 1 If the witness confesses, his tes- 
timony is conclusive against himself; if he denies, his 
testimony is rejected, and other evidence is sought to 
convict him. If this evidence is sufficient to prove the 
case of the government, it does not need to compel the 
witness to testify. If it is insufficient, the witness is in 
position to decide the case in his own favor, and the pre- 
sumption is thoroughly established by experience that he 
will generally so decide. 

A remarkable illustration of the light esteem in which 

1 In 1907 the government ceased to compel travellers from abroad 
to make oath to the truth of their declarations. 



128 THE METHODS OF TAXATION 

oaths have come to be held in these proceedings is afforded 
by the conduct of many of the assessors of taxes. They 
are sworn to assess all property at its fair value, but in 
some states few of them pretend even to attempt to do 
so. Their disregard of the law is justified, in their opinion 
and in that of their several districts and communities, 
by the gross inequalities which prevail under the present 
system. 1 In their relations to the state government these 
districts are like individuals. For purposes of taxation 
they are obliged to report to the authorities of the state 
the amount of property owned within their limits, and 
they are thus interested to have this amount appear as 
small as possible. The assessors, therefore, are under a 
strong inducement to undervalue property. To assess it 
at its full value in one district, while in others it is as- 
sessed at much less than that value, is to subject the first 
district to an unfair burden. The assessors are sensible 
of this injustice, and they are aware that, if they assist 
in perpetrating it, they will become odious and not im- 
probably lose their positions. That these considerations 
are generally more potent than the obligation of an oath 
appears from the confessions of the assessors, and from 
much other evidence. As a rule, bonds and notes are 
assessed at their full value, and so are bank stocks; but 



1 The attitude of these assessors resembles that of the English juries, 
at a time when the law made it a capital crime to steal in a dwelling- 
house to the value of forty shillings. Rather than take the life of a fellow 
creature, guilty only of a petty theft, the jury would declare the value 
of the goods taken to be less than forty shillings, although it might be 
obviously much greater. In 1808 a jury found on their oaths that a 
£10 Bank of England note was worth only 39s. Sir S. Romilly cited in 
Parliament a case in 1732, where a woman had stolen two guineas and 
two half-guineas, but the jury pronounced the total value of the four 
coins to be Sunder 40s." 



THE PROPORTIONATE METHOD 129 

real estate, especially where the agricultural interest is 
strong, is often greatly undervalued. In this way those 
persons who are too scrupulous or too helpless to conceal 
their ownership of certain forms of property already taxed 
doubly, are, through the exemption of others, still further 
amerced. 

Complaints, both official and private, of these abuses 
have been repeatedly uttered in all parts of the country. 
We may select, as an example of prevalent conditions, 
possibly at their worst, the practices found to exist in the 
city of Chicago, in 1897, by the Taxpayers' Defense 
League. The inequalities in the assessment of the general 
property tax, as well as the corruption of the assessors, 
disclosed by the investigations of this league, are so ex- 
treme as to make it seem almost incredible that any scrupu- 
lous person could carry on business, or even own prop- 
erty, in that city. For the purpose of decreasing the taxes 
payable to the state and other public corporations, the 
assessors of the several taxing districts in Chicago were 
in the habit of finding the " fair cash value " of real 
estate to be on the average about one-tenth of its fair 
market value ; although the assessment of some lands was 
at tenfold the rate applied to others. In order to raise 
a tax amounting to one per cent of the market value of 
property, it thus became necessary to have a tax rate of 
ten per cent. The assessors, however, in some cases from 
confessedly corrupt motives, often assessed certain owners 
of personalty for its full value, while they assessed others 
notoriously possessed of large wealth of this kind for 
trifling amounts, or exempted them altogether. The rate 
at which banks and trust companies were assessed varied 
from 16 per cent of their total capital and surplus down 

9 



130 THE METHODS OF TAXATION 

to nothing. There has been perhaps, on the whole, a 
tendency to assess personal property, like real estate, at 
about one-tenth of its value; but the assessments are 
altogether arbitrary. Immunity has frequently been of- 
fered in behalf of the assessors; and where taxpayers 
have refused to pay blackmail, their assessments have been 
made almost confiscatory. 1 

When we review the evidence that has been accumulated 
on the operation of laws enacted for the taxation of in- 
tangible property, and even of personal property in gen- 
eral, the conclusion seems unavoidable that such laws 
necessarily work injustice. In order to carry them into 
effect, assessors must be armed with power to compel dis- 
closure; and this power can be exercised only through 
demoralizing methods, and with demoralizing results. The 
fact that such measures as are perhaps necessarily em- 
ployed for the detection of crime and the recovery of stolen 
property, are resorted to for the collection of a tax, estab- 
lishes a presumption that the tax is inequitable. Such 
measures would never be employed unless the tax were 
actually collected from only a part of the persons com- 
manded to pay it. A tax of this description, as we have 
seen, increases the burden of those who pay it to the 
extent that the burden of those who escape it is dimin- 
ished, and the great expense of employing the methods 
of criminal procedure increases this burden still further. 
Treachery and deceit are the necessary weapons of spies 
and informers, and these arts are so infamous in the 
estimation of mankind as to make it improbable that 
honorable men will be induced by pecuniary rewards to 
engage in an occupation where they must be employed. 

1 For details, see Appendix B. 



THE PROPORTIONATE METHOD 131 

It is not surprising therefore that men so indifferent to 
the hatred and contempt of their fellows as to follow this 
base occupation, should be susceptible to bribes, or dis- 
posed to levy blackmail when bribes are not offered. The 
extent to which corruption of this kind prevails is far 
greater than is supposed by those who have not had oc- 
casion to investigate the subject, and it is obviously likely 
to be increased by laws which enable informers to com- 
pound taxes at their discretion. ~No one sincerely de- 
sirous of attaining justice in the distribution of the burdens 
of taxation can approve of the employment of corrupt 
men, or of corrupting and demoralizing methods in the 
administration of the law. 1 When the information neces- 
sary to assess the property for taxation can be had only 
by inducing the trusted agents of the owner to betray 
him, it seems much wiser to change the law than to have 
the state encourage falsehood and deception. The con- 
duct of the numerous class of persons whose intangible 



1 Some of the objections to the preliminary examination of one not 
yet charged with an offense are stated by Prof. Wigmore as follows. " It 
is the innocent that need protection. Under any system which permits 
John Doe to be forced to answer on the mere suspicion of an officer of 
the law, or on public rumor, or on secret betrayal, two abuses have always 
prevailed, and inevitably will prevail: first, the petty judicial officer 
becomes a local tyrant and misuses his discretion for political or mer- 
cenary or malicious ends; secondly, a blackmail is practiced by those 
unscrupulous members of the community who through threats of in- 
spiring a prosecution are able to prey upon the fears of the weak or the 
timid." So in the case of one duly charged by indictment, and placed 
on trial. Assuming him to be innocent, why should he not be exam- 
ined? "The real objection is that any system of administration which 
permits the prosecution to trust habitually to compulsory self-disclosure as a 
source of proof must itself suffer morally thereby." The employment of 
torture is only an extreme application of the theory. The Holy In- 
quisition endeavored by every kind of compulsion to extort confession, 
because then evidence was not needed to establish guilt. Wigmore, 
Evidence, § 2251. 



132 THE METHODS OF TAXATION 

property is not assessed may be very reprehensible; but 
it is less subversive of justice than the conduct of rulers 
who endeavor to enforce taxes considered unjust by those 
on whom they are levied, through methods which under- 
mine the very foundations of confidence. When the law 
puts a premium on vice, obedience to law ceases to be 
regarded as a virtue. 

The policy of compelling taxpayers to return lists of 
all their property and its value, verified by oath, has been 
condemned by both reason and experience. In practice, 
these methods of disclosure violate the rules that courts 
have found indispensable to the attainment of justice. 
They encourage perjury, they lead to the employment 
of informers and to the corruption of assessors, they 
lighten the burdens of the strong and the unscrupulous, 
and they correspondingly aggravate those of the weak and 
the conscientious. These results are so notorious, and even 
so scandalous, as to make the law a by-word. The inequal- 
ity of its operation causes men to despise and detest their 
government, and leads them to think it not only justifiable 
but even praiseworthy to elude its inquisitorial proceed- 
ings. Hardly any one denies the existence of all these 
evils. Wherever we inquire, the testimony is overwhelm- 
ing that compulsory disclosure is so imperfectly enforced 
as to produce great injustice; and we cannot avoid the 
conclusion that this method cannot be consistently sup- 
ported by those who hold the attainment of justice to be 
an end in taxation. 1 

1 "The obvious method of requiring an oath as to the accuracy of the 
return, coupled with the severe penalties attached to all perjury, have 
been found by experience to be of very doubtful expediency. The his- 
tory of taxation in the United States has long since established the fact, 
on documentary evidence, that in that country this requirement has 



THE PROPORTIONATE METHOD 133 

For similar reasons, the proportionate method cannot 
be regarded as conforming to present standards of justice. 
The theory of justice which it expresses is not accepted 
by most men, even if they acquiesce in its practical ap- 
plications; and it is so repugnant to the convictions of 
a considerable number as to make every attempt to apply 
it practically more and more difficult. Under these cir- 
cumstances it would be vain to hope that any system of 
taxation embodying this method could be permanent. It 
would be subjected to incessant attack, and even if it 
applied the method perfectly, the uncertainty of its dura- 
tion would cause so much injustice among many classes 
as to outweigh the advantages of theoretical perfection. 
Moreover, this method has not only never been applied 
with any approach to perfection, but is also, as we shall 
see, apparently incapable of being so applied; and the 
difficulties in the way of its application are of a nature 
to increase in the future. A partial application of such 
a theory, however, utterly negatives its claims to justice. 
Unless every one is taxed in proportion to his property, 
some must be taxed too much and others too little; a 
result in direct contradiction of the theory. Whatever 
the theoretical merits of the method may be, it is evident 
that the general property tax would carry it out only 
if all property were assessed at its true value and to its 
true owner ; a result which is nowhere even approximately 
attained. 

made perjury habitual in tax assessments. The danger of using the oath 
in connection with self-assessment of taxes lies in this fact, that, besides 
its evil effect on morals, it still further increases the inequality of assess- 
ments ; one part of the taxpayers will have their consciences aroused by 
the oath, while others do not, so that the inequality to be expected 
under any system of self-assessment will simply be augmented." Cohn, 
Science of Finance, p. 618. 



134 THE METHODS OF TAXATION 

Moved partly by the desire to remedy the conspicuous 
injustice of " double taxation/' and partly by the disposi- 
tion to make taxation progressive, or degressive, legisla- 
tures have specifically exempted certain forms of property, 
with the result of making the operation of the general 
property tax even more unequal. Sufficient furniture 
for an ordinary household, sufficient food, clothing and 
fuel for ordinary requirements, together with the im- 
plements and stock necessary for a livelihood, are every- 
where relieved from taxation. For similar reasons, as 
well as for several others, deposits in savings banks and 
the investments of many insurance companies, are in some 
states, not taxed; and, as we have observed, the bonds 
of various governing bodies are by their terms untaxable. 
The value of the securities thus withdrawn from assess- 
ment is collectively enormous; and, however wise the 
policy of such exemption may be, it must necessarily re- 
sult in increasing the taxes on non-exempt property. Vast 
quantities of merchandise are exempt under the provi- 
sions of the Constitution of the United States relating to 
commerce; great sums of money are exempt either for 
the same reason, or because the attempt to tax them would 
demoralize all industry. It should be added that while 
it is the rule not to tax directly the owners of the stocks 
of corporations, when the corporation is taxed on what it 
owns, this is not the rule concerning bonds; while some 
states tax their citizens on their holdings of stock in for- 
eign corporations. The popular outcry that personal prop- 
erty evades taxation is usually an ignorant one. By far 
the greater part of such property is in some states exempt 
by law; but the burden thrown upon the holders of the 
remainder may thus be correspondingly aggravated. 



THE PROPORTIONATE METHOD 135 

As the exemption of many forms of property defeats 
the purpose of the general property tax, so the imposi- 
tion of additional taxes effects a similar result. Assum- 
ing that the aim of the proportionate method would be 
attained under such a general tax, the equality of burdens 
is obviously disturbed by any increase in the burdens of 
particular individuals or classes. During recent years, 
the number of new taxes imposed has been considerable, 
and their amount has materially increased. Most of them 
are of the nature of licences, or taxes imposed on certain 
forms of industry. The government may permit indi- 
viduals to do certain things which they could not lawfully 
do without that consent, and exact a payment for its per- 
mission or licence. Or it may forbid individuals to con- 
tinue to do things which they might lawfully have done, 
unless they pay for the privilege. According to the com- 
mon law, men cannot associate themselves in a business of 
which they share the profits without entering into partner- 
ship. But every partner is liable for the debts of the 
partnership to the extent not only of what he has con- 
tributed thereto, but also of his whole private estate. 
Under these conditions, no one possessing money and com- 
mon sense will enter into partnership except with men 
whom he knows to be trustworthy. Many persons, how- 
ever, have money which they wish to invest, and many 
have talents and experience which they wish to employ. 
To permit such men to combine is so evidently advantage- 
ous to industry that the law of unlimited liability has 
been modified. Men may now form partnerships, called 
corporations, with the assurance that they can at worst 
lose only the amount actually invested in the enterprise. 
The enormous extent to which this device is employed 



136 THE METHODS OF TAXATION 

shows its necessity in our modern industrial system; and 
it at the same time suggests to our legislatures the pos- 
sibility of utilizing this necessity as a source of revenue. 

We accordingly find that the legislation of recent years 
has been fruitful of all kinds of taxes on corporations. 
The nature and extent of these taxes need not here be 
considered, but it is undeniable that they constitute a 
burden of appreciable weight, and must materially alter 
the proportion which the burden of taxation has borne 
to the property of the citizens at large. The taxes levied 
on railroad companies in the State of New York amount 
to nearly two-thirds of their dividends, and those on in- 
surance companies are frequently equal to their premium 
receipts. It is clear that these taxes must fall, in the first 
instance, either on the owners of the stock of these com- 
panies, through the reduction of their dividends, or on 
passengers and freight; or on those who insure their pos- 
sessions, through the increase of their premiums; or be 
distributed among these classes. In the same way, the 
fees derived from licences to carry on particular trades, 
and especially the traffic in alcoholic drinks, must disturb, 
and often very greatly disturb, the equality of burdens 
contemplated by the general property tax. 

And, finally, all possible claim that proportionate taxa- 
tion is secured through the general property tax is disposed 
of by the establishment of a system of taxation, based upon 
a different principle, by the action of the general govern- 
ment. The taxes levied under this system have no rela- 
tion to the amount of property owned by those who pay 
them, or to the revenue of such persons. They are taxes 
assessed on certain kinds of goods, and are presumptively 
paid by the consumers of such goods, not in proportion to 



THE PROPORTIONATE METHOD 137 

their revenue, but in proportion to their consumption or 
expense. Such expense may sometimes be in proportion 
to the revenue of the consumer, but it is frequently alto- 
gether disproportionate thereto. The most notable example 
is afforded by the tax on imported sugar. The effect of 
this tax is to make the price of sugar to the consumer much 
greater than what the producer receives, and as the quan- 
tity consumed is very large, the burden is both individually 
and collectively very heavy. The amount expended by a 
rich man for sugar, however, must be insignificant in pro- 
portion to his other expense, while in the case of a poor 
man this proportion is very considerable. This tax, there- 
fore, which amounts to some fifty million dollars in duties, 
and as much more in " protection " to the producers of 
beet sugar and to the planters of Hawaii, Porto Rico, and 
Cuba, seems to be altogether inconsistent with the propor- 
tionate method, falling lightly on the rich, and heavily 
on the poor. 



CHAPTER V 

INCOME TAXES 

Sittce the difficulties in the way of an equal assessment 
of all property appear to be insuperable, and since the 
proportionate method can be carried out only through such 
an assessment, it might seem that we were justified in con- 
cluding at once that proportionate taxation is impracti- 
cable. We might go further than this, and conclude that 
progressive taxation is likewise impracticable, for it does 
not appear how it can be justly applied unless the assessors 
are able to learn the amount of the property of every citi- 
zen — knowledge, as we have seen, the acquisition of which 
is quite beyond the power of government. It is conceiv- 
able, however, that revenue may be more ascertainable 
than property ; that the amount of the income of every one 
may somehow be known, although the amount of his pos- 
sessions eludes discovery. Various measures of taxation 
based on this theory have been devised, and are now in 
general use, the most important of which are those com- 
prised under the name of the income tax. 

Although such taxation is not now employed by our 
government, it is an established feature of the English 
system, and it will be instructive to examine its operation 
in that country. The conditions prevailing there are on 
the whole much more similar to our own than those of 
other lands. Our political institutions, and the great body 
of our law, are of English origin. What is most impor- 
tant, the general attitude of both peoples toward govern- 



INCOME TAXES 139 

ment is the same. Both are disposed to maintain what they 
call their liberties; those prerogatives of the individual 
subject which rulers are compelled, by tradition as well 
as by constitutional restraints, to regard. The peoples of 
Europe have had no such defense against despotism, and 
as they have not been trained to take pride in the successful 
resistance of their ancestors to the encroachments of arbi- 
trary power, they have little of what we are fond of calling 
the independent spirit of freemen. Hence they endure 
governmental regulation and interference with a submis- 
siveness which Englishmen can scarcely comprehend, and 
which they would certainly not imitate. We cannot, there- 
fore, reason safely from the analogy of these countries. 
Measures that operate successfully, where neither law nor 
tradition encourage the subject to maintain an independent 
attitude toward his rulers, may fail where a sturdier spirit 
prevails. Eor our purposes, the most useful lessons are to 
be drawn from English experience ; and this is peculiarly 
true of measures that have been adopted after careful and 
intelligent deliberation. 

Although the injustice resulting from the general prop- 
erty tax, as commonly and perhaps necessarily adminis- 
tered, has caused many writers to look with favor upon the 
income tax, yet, as a tax on property is presumptively paid 
out of income from that property, and as the value of 
property is generally regulated by its capacity to produce 
income, it might seem that a tax upon income was the same 
as a property tax. It differs, however, in the respect that 
many persons who own little property have incomes arising 
from the services which they render to the community. 
The collective income of common laborers is enormous, 
but their property holdings are comparatively small. Many 



140 THE METHODS OF TAXATION 

professional men have large incomes, but comparatively 
little realized property. Many merchants and manufac- 
turers borrow much of their capital, and their incomes may 
be out of all proportion to the property which they own. 
The number of persons in receipt of regular salaries has 
in modern times become very great, and many of them have 
no other means of subsistence. It is reasoned, therefore, 
that the proportionate method of taxation requires that this 
large and increasing class of persons should contribute to 
the support of the government. For it is to be observed 
that Adam Smith's first maxim declares that subjects 
should contribute, not in proportion to their property, but 
in proportion to the revenue that they enjoy under the 
protection of their government. 

But when we consider the sources of this revenue, we are 
confronted at the outset with a serious perplexity. For, 
as we shall see, incomes as well as property may be classi- 
fied as earned or unearned, and to tax all classes alike 
would seem to offend against the prevailing conceptions of 
justice. On the other hand, to exempt from taxation those 
who possess incomes but not property appears to many per- 
sons clearly inequitable. The perplexity is illustrated by 
some observations made by Professor F. W. Taussig. 
Speaking of the property tax, he remarks: 

" One man has little property, but earns a handsome income 
from a lucrative profession; another man, or perhaps a frail 
woman, also has a little property and is dependent on this alone 
for a slender livelihood. Are both to be taxed alike? The 
same disproportion appears when one man uses property in 
business operations as a means of earning an income from com- 
bined labor and capital, while another has a simple investment 
or domicile of his own/' 



INCOME TAXES 141 

To arrive at a satisfactory solution of such problems, 
however, it is important to compare parallel cases, and the 
instances given above are plainly not parallel. Let us 
suppose rather that there are two frail women, one of whom 
supports herself by sewing, or washing, while the other 
depends entirely on the income from a small property. It 
seems probable that most men would think it more just 
to tax the woman who presumptively renders no service 
to society, rather than the one who earns her income by 
severe toil. Or we may compare the man who earns a 
handsome income as a physician, with one who has an 
equal income from investments. Here, too, most men 
would probably think it more just to tax the man who does 
not work, rather than him who does ; especially when the 
receipt of the professional income implies years of prelim- 
inary study, during which there has been much outlay 
and no income at all. To a considerable extent the same 
judgment might obtain concerning two men, one in ac- 
tive business, and the other not; one deriving his 
income from skillful management and assiduous industry, 
the other from wealth which he may have had no part in 
producing. 

In such cases the property tax is presumptively levied on 
the land and goods of the man in business, and his profits 
are what is left after paying this and other expenses. 
They may be regarded as measuring the value of the serv- 
ices which he renders to his customers, and it is quite con- 
ceivable that the attempt to reduce his remuneration, even 
if it seemed just, might not be successful. For, assuming 
the total burden of taxation to remain the same, income 
taxes would tend to diminish that part of the burden borne 
by those who derive their income from property, and to 



142 THE METHODS OF TAXATION 

increase that borne by those who are paid for services. 
It is at least possible that the latter class might increase 
the charges for their services until the former equilibrium 
was restored. Denning laborers, loosely, as those who use 
no capital, but obtain their income by selling their services, 
it is evident that, in the opinion of the public, justice 
does not demand the taxation of such income. Those 
other members of the community who render services for 
pay must employ capital, either owned or borrowed, upon 
which they already pay taxes, the reduction of which would 
only in part compensate them for their payment of an in- 
come tax. It seems probable, therefore, that a tax of this 
kind would result either in such an increase of income 
from services as would tend to reestablish the present 
equilibrium, in which case it would depend on fiscal rea- 
sons for its justification; or else that it would increase the 
incomes of those who depend on accumulated property, 
at the expense of those who render services to the com- 
munity, a result which conflicts with prevalent theories of 
justice. 

Moreover the equal taxation of incomes, like the equal 
taxation of property, cannot result in any equality of sac- 
rifice. The necessary expenses of two men receiving the 
same income, like those of two men of equal property, may 
be very different in amount, and a tax which would be 
scarcely felt by one may be a grievous burden to the other. 
The income tax, furthermore, unless assessed in a very 
scientific and complicated manner, causes an additional 
inequality of sacrifice. The incomes of a very large num- 
ber of persons certainly cease at their death, and as their 
abilities generally decline before they die, their incomes 
also diminish, if they do not altogether disappear. A tax 



INCOME TAXES 143 

on incomes derived from terminable annuities, or from 
personal earnings of every description, is thus a heavier 
burden than an equal tax on incomes arising from realized 
property. In the former case it is necessary, in order to 
provide for subsistence during a period of incapacity, and 
for the support of the family, to save a part of the income, 
while in the latter case the whole of it may be spent with- 
out improvidence or injustice to those who are dependent. 
Many plans have been suggested for the correction of 
this inequality, such as the exemption of income de- 
voted to life insurance, and other forms of saving, but 
the difficulty of applying such plans, except in a gen- 
eral way, makes it impossible to prevent injustice in 
particular cases. 

For more than two generations Parliament has strug- 
gled with the problem of distinguishing between earned 
and unearned incomes. It is easy to make the distinction 
in particular cases. To formulate a general principle has 
hitherto seemed impossible. Nevertheless the attempt has 
at last been made, and since 1907 what are called earned 
incomes under £2000 (or those parts of incomes of that 
amount which are earned) are taxed at nine-pence instead 
of one shilling. The distinction, however, must be of a 
very arbitrary character. The income of a lawyer or of a 
physician, so far as it consists of fees, may be properly 
enough said to be earned. But professional men having 
families must provide for their future. Some of the 
earned income must be saved and invested, and it seems 
unjust to treat the income arising from such investments 
as unearned. To tax it is to discriminate in favor of ex- 
travagant living, and to discourage men from laying by 
a part of their earnings, that when they become feeble 



144 THE METHODS OF TAXATION 

they may not suffer want, and that when they die their 
families may not be left destitute. 

A man engaged in trade may be said to earn his income. 
But he may cease to be active, while his capital remains 
in his business. He may thus continue to receive an in- 
come which would be classed as earned, but which is not 
earned by his labor, as it was before. Or he may turn 
his business into a stock company, while continuing to 
carry it on himself, and thus earn his income as much as 
ever he did. Apparently, however, he is now living on the 
proceeds of an investment, and his income might be classed 
as unearned. Strictly speaking, only such income is un- 
earned as comes to its owner because of no effort, past or 
present, on his part. Such may often be the income of 
the recipient of a large legacy; but even here the legatee 
may have rendered some service to his deceased benefactor. 
The mere fact that the estate of the decedent is large can- 
not of itself establish any presumption that the legatees, 
especially if their portions are small, have done nothing 
to earn what they receive. In so far as insurance is 
effected against the death duties, they really constitute an 
income tax. They may therefore be equivalent to a tax on 
the savings of industrious and prudent men; that is, on 
their earned income, capitalized. 

Fortunately for our purpose, the conformity of the in- 
come tax to recognized principles of justice has been con- 
sidered by some of the most enlightened English statesmen. 
Mill, Fawcett, and Gladstone have all treated the subject, 
and their reasoning has not been affected by the lapse of 
time. We have hitherto assumed it to be comparatively 
immaterial whether a tax was imposed on property, or on 
revenue, and have treated Adam Smith's first maxim as if 



INCOME TAXES 145 

it was illustrated by the general property tax. While it is 
true that a tax on property is practically a tax on the 
revenue which the property produces, true even, in one 
sense, that all revenue is ultimately derived from property, 
it is obvious that much revenue is received as direct com- 
pensation for labor or service, and that those who receive 
it may own little or nothing subject to a property tax. 
The income tax, therefore, as it affects all forms of revenue 
alike, seems more equitable than the property tax, and 
apparently conforms precisely to the principle stated by 
Adam Smith. Yet when we consider the sources of rev- 
enue, we have already observed that the situation of a man 
whose income is derived from accumulated wealth is very 
different from that of one who depends on his daily labor. 
The latter is under the strongest inducement to save a 
portion of his earnings in order to provide for the sup- 
port of his family in case of his death, or for his own sup- 
port after he becomes incapacitated. The former is under 
no such compulsion, and his income is substantially to that 
extent greater. But if we try to determine how much 
greater, we find the problem extremely complex. For the 
property of one man may be of very uncertain value, re- 
garded as a permanent investment, as in the case of a mine, 
or a ship, or even a house ; while that of another may be 
almost absolutely secure. The revenue derived from prop- 
erty of the former class may be very much greater than 
that from the latter; or, to state the case more precisely, 
equal incomes may be derived from principal funds of 
very unequal values. The larger income implies a greater 
risk of losing the principal, a risk which should be cov- 
ered by insurance, as in the case of income derived from 

daily service. 

10 



146 THE METHODS OF TAXATION 

At the present time a loan or investment which is, in 
human estimation, entirely safe, will perhaps produce a 
return of three or four per cent, while some fairly secure 
stocks pay eight or even ten per cent on their market price. 
So money invested in trade, although in this case there is 
an element of service to be considered, often yields a profit 
of fifteen or twenty per cent. No wise man acts on the 
presumption that these precarious revenues will always 
continue ; he prepares for possible and even probable loss, 
by saving, and his available income is only what is left 
after he has subtracted a proper allowance for the risk 
that he is taking. A great part, if not the greater part, of 
the capital employed in trade is borrowed, and a great part 
of the revenue which it produces, while commonly regarded 
as the income of the borrower, is properly that of the 
lender. Some men invest in terminable annuities; they 
secure an income for life by sacrificing the whole of their 
principal. Such income is evidently not the same as that 
which leaves the principal intact ; it consists in great part 
of payments made out of principal, and he who receives it 
has no means of meeting an unforeseen increase in his 
expenses. The gross income from property received by 
any one thus appears to be a very imperfect measure, either 
of the value of his property, or of his ability to contribute 
to the support of the government. And Mill contends that 
to tax that part of incomes which is saved and reinvested 
involves double taxation. 

Much the same is true of income derived from labor or 
services. In the case of young men, such income may be 
earned for many years, and may reasonably be expected 
to increase for a part of that period. Yet the vicissitudes 
of life are so numerous that we commonly praise young 



INCOME TAXES 147 

men who do not spend all that they earn, but save enough 
to provide insurance against the more common forms of 
disaster. With advancing years and declining strength, 
it is clear that such income tends to decrease, and it may 
be regarded, like a life annuity, as drawn in part at least 
from principal. In certain occupations, such as those of 
writers and actors, income depends very much on the favor 
of the public, and unless very large deductions are made 
to provide against the vagaries of popular taste, affluence 
may suddenly give place to positive want. In manufac- 
tures and in trade in general, similar precautions should 
be indispensable, as we may infer from the great number 
of commercial failures. The profits of one year are fre- 
quently swept away by the losses of another, and a great 
part of such profits should be set aside as a reserve, and 
not treated as income available for expenditure. Other 
illustrations might be added, but these are sufficient to 
show that a tax on income in general is so extremely un- 
equal in its operation as to be hardly reconcilable with 
ordinary standards of justice. It may put a premium on 
improvidence, and increase the inherent inequalities of 
natural conditions. 

This conclusion is confirmed when we observe the dif- 
ferences in the demands on the incomes of different men. 
One may be charged with the support of his parents and of 
his wife and children, while another may have no one to 
maintain but himself. In the former case the income 
which is regarded by the law as belonging to the head of 
the family, belongs really to all its members ; and in this 
case also the importance of the life of the " bread-winner " 
requires that some of his income be devoted to its insur- 
ance. The greatest differences also exist in the health, in 



148 THE METHODS OF TAXATION 

the ability, and in the industry of men whose income is 
the same; and in their needs there are corresponding dif- 
ferences. Some men earn money easily, but live with 
great frugality. Others are prone to wear themselves out 
with hard work, which they can endure only if they live 
in a generous way. These differences cannot be offset, one 
against another; they are often combined in such a man- 
ner as to make the conditions of life either extremely easy, 
or almost intolerably burdensome. There is no semblance 
of justice in taxing at the same rate two equal incomes, 
one of which is drawn as interest from sound investments 
by a vigorous man having, few needs and no family, while 
the other is earned with the most painful toil by a person 
in frail health, who must out of it provide not only for the 
present sustenance of half a dozen dependents, but also for 
their future support in the event of his death. 

The equal taxation of incomes, therefore, may result in 
greater inequality of sacrifice than the equal taxation of 
property. The property tax falls lightly on the largest 
class of all, the laborers; but an income tax must be de- 
ducted from their wages. The property tax affects what 
has been called " spontaneous " income ; it reduces income 
for which the recipient may have in many cases expended 
no labor, while it does not seem to touch the " industrial " 
income, which is the recompense paid by society for present 
services. The income tax falls indiscriminately on both 
species of revenue. The property tax, so far as it is levied 
on real estate, does not differ materially from a tax on 
income derived from rent, and is no more unjust than 
such a tax. In so far as the property tax is levied on tan- 
gible personalty, it is similar to a tax on the income from 
such property, and one tax seems as just as the other. The 



INCOME TAXES 149 

results of attempting to tax intangible property we have 
examined at length, and there is no obvious reason why the 
results of attempting to tax the income of such property 
should be different, or why the same injustice should not 
be caused in either case. Eents, wages, and salaries, it is 
true, can to some extent be determined by the inspection 
of the assessor. Their amount is frequently a matter of 
record, and always a matter of agreement between two or 
more parties, both, or all, of whom must concur in order 
to conceal the true character of the transaction. Taxes 
on these sources of revenue, therefore, might be assessed 
with some approach to completeness. Provided the asses- 
sors were faithful, they could generally ascertain what 
rents and salaries were paid, without insisting on disclo- 
sure by the recipients; and in the case of wages the ac- 
counts of corporations would furnish satisfactory evi- 
dence. But the profits of a business or profession cannot 
always be accurately estimated. Many assets are of uncer- 
tain value, many debts are doubtful, many enterprises 
require years for successful — or unsuccessful — comple- 
tion, and many persons in business, in small ways as well 
as large, do not themselves really know how they stand. 
But if the profits of a business are often scarcely known 
to its owner and manager, they are not likely to be known 
to any one else, and are certainly not ascertainable by the 
inspection of the assessor. On this point Mill's observa- 
tions are as correct now as when they were first made. He 
says: 

" Notwithstanding, too, what is called the inquisitorial na- 
ture of the tax, no amount of inquisitorial power which would 
be tolerated by a people the most disposed to submit to it, could 
enable the revenue officers to assess the tax from actual knowl- 
edge of the circumstances of contributors. Eents, salaries, 



150 THE METHODS OF TAXATION 

annuities, and all fixed incomes, can be exactly ascertained. 
But the variable gains of professions, and still more the profits 
of business, which the person interested cannot always himself 
exactly ascertain, can still less be estimated with any approach 
to fairness by a tax collector. The main reliance must be 
placed, and always has been placed, on the returns made by the 
person himself. No production of accounts is of much avail, 
except against the more flagrant cases of falsehood ; and even 
against these the check is very imperfect, for if fraud is in- 
tended, false accounts can generally be framed which it will 
baffle any means of inquiry possessed by the revenue officers to 
detect ; the easy resource of omitting entries on the credit side 
being often sufficient without the aid of fictitious debts or dis- 
bursements. The tax, therefore, on whatever principles of 
equality it may be imposed, is in practice unequal in one of the 
worst ways, falling heaviest on the most conscientious. The 
unscrupulous succeed in evading a great proportion of what 
they should pay; even persons of integrity in their ordinary 
transactions are tempted to palter with their consciences, at 
least to the extent of deciding in their own favor all points on 
which the smallest doubt or discussion could arise ; while the 
strictly veracious may be made to pay more than the state in- 
tended, by the powers of arbitrary assessment necessarily in- 
trusted to the commissioners as the last defense against the 
taxpayer's power of concealment. It is to be feared, therefore, 
that the fairness which belongs to the principle of an income 
tax cannot be made to attach to it in practice ; and that this 
tax, while apparently the most just of all modes of raising a 
revenue, is in effect more unjust than many others which are 
prima facie more objectionable." Pol. Ec, Book V, Chap. II, 
§ 5. 1 

1 Mr. Gladstone condemned this tax even more emphatically. In his 
budget speech, in 1853, he expressed himself as follows: "Even if you 
could remove the inequalities, there would still remain, in my mind at 
least, objections to it of the gravest character. The machinery of the in- 
come tax, involving, as it necessarily does, to so large an extent, the 
objectionable principle of self-assessment, can never be satisfactory to 
the country. First, because self -assessment leads to grievous frauds 
upon the revenue, and renders the real inequality of the tax far greater 



INCOME TAXES 151 

The propriety of this criticism has been established by 
experience. On several occasions facts have been inciden- 
tally brought to light which prove that the injustice de- 
scribed by Mill is very extensive, and enable us to estimate 
its degree with some approach to accuracy. In order to 
comprehend these facts, however, it is necessary to under- 
stand that system of taxes in England which is incorrectly 
spoken of as " the income tax." In a certain sense, of 
course, every tax is an income tax. It diminishes the 
income of the person who pays it, or of some other person. 
A tax on beer, for instance, must diminish the income of 
brewers, or of inn-keepers, or of beer drinkers, or of all 

than any of those among its inequalities which immediately strike the 
public eye and feelings; and, secondly, because of the tendency to im- 
morality, which is, I fear, essentially inherent in the nature of the ope- 
ration. The public feeling of its inequality is a fact most important in 
itself. The inquisition it entails is a most serious disadvantage. And 
the frauds to which it leads are an evil which it is not possible to charac- 
terize in terms too strong. I believe it does more than any other tax 
to demoralize and corrupt the people." Disraeli declared "The odious 
features of this tax cannot by any means be removed or modified." Prof. 
Thorold Rogers wrote in 1884, "Nobody defends the income tax. It 
was first imposed on the tyrant's plea that the administration cannot do 
without it, and it has been continued for the same reason. Every Chan- 
cellor of the Exchequer has condemned it in principle, and has con- 
tinued it in practice. It is not wonderful, therefore, that, fortified by 
these avowals, people who can evade the tax do so." D. A. Wells, in 
his Theory and Practice of Taxation, p. 529, remarks: "Those only 
who were officially and intimately connected at this time with the In- 
ternal Revenue Department of the United States Treasury can form any 
adequate idea of the amount of perjury and fraud that characterized 
and pervaded the country during the years 1867 to 1872, as the out- 
come of the then existing system of internal revenue. And American 
ingenuity was never more strikingly illustrated — not even by the ex- 
hibits of the patent office — than it was at that time in devising and 
successfully carrying out methods for evading the taxes on incomes and 
distilled spirits." In 1869, the population being thirty-seven millions, 
the number of persons returning income for taxation was about 260,000. 
In 1872, with a population of thirty-nine millions, the exemption having 
been raised from $1,000 to $2,000, the number of returns was only 
73,000, and the receipts were comparatively insignificant. 



152 THE METHODS OF TAXATION 

three classes. A tax on imported sugar must diminish the 
income of the- importer, or of the refiner, or of the con- 
sumer. But it would cause great confusion to describe 
such taxes as income taxes, and the term is generally, ap- 
plied to taxes assessed directly on the revenue of the indi- 
vidual taxpayer, whether that revenue he in the form of 
wages, or salaries, or rents, or interest, or profits. 

The English system, however, assesses directly only in- 
come in the shape of profits, and, in some cases, in the shape 
of salaries and interest. There is a tax on salaries paid 
by certain corporations, but it is assessed on the employer, 
who may or may not ^.x accordingly the amount which he 
pays in salaries. There is a tax on payments of interest 
on loans by governments and other corporations, which is 
assessed on them, and which may or may not be considered 
in fixing the rate of interest paid on their loans. There 
is a tax on rents, assessed to the tenant, who may or may 
not pay a rent reduced by the amount of the tax. Nomi- 
nally, in all cases, the landlord, or the bondholder, or the 
clerk may be charged with the tax, but we cannot assume 
that the tenant, or the debtor, or the employer, suffers no 
diminution of income on account of the tax. During the 
war with the Transvaal Republic, the British Government 
taxed its consols by increasing the income tax. But when 
it borrowed it was compelled to pay a much higher rate of 
interest than before, the price of consols falling from 112 
to 92, so that the net income received by those who lent 
it their money was probably rather more than it would have 
been had the tax not been increased. 1 

We find, in fact, that many large borrowers covenant 

1 The interest on consols had been reduced from 3 per cent to 2f , in 
1888. It was reduced to 2\ per cent in 1903, and consols have since 
sold below 84. 



INCOME TAXES 153 

with their creditors that the interest payable on their loans 
shall not be reduced by taxation. The government of the 
United States has issued its bonds on these terms, and 
many states and municipalities exempt their own bonds 
from taxation. It is evident that the authorities who con- 
tract these loans suppose that if they were taxed the rate 
of interest would be increased, and they would regard it 
as a foolish proceeding to issue a loan at four per cent, 
with the proviso that one per cent should be deducted as 
an income tax. This, however, is practically what is done 
by the British Government; and it also makes the value 
of its obligations more speculative by leaving the lender 
in uncertainty as to the rate at which it will tax them. 
This uncertainty tends to impair the value of these stocks, 
while the revenue of the government is of course lessened 
by the expense of much needless bookkeeping. 

This digression has been introduced not to call attention 
to the diffusion of taxes, a subject which will require much 
more exhaustive treatment, but to show that the restric- 
tion of the meaning of " income/' in common usage, is 
not arbitrary. In fact it would be well to limit the term, 
" income tax," to a tax on revenue that has actually passed 
into the possession of the ultimate owner. Revenue in the 
hands of persons who have to deliver it to others must gen- 
erally be subject to some deductions, and it is not always 
easy to determine its true amount. Thus a tax is imposed 
in England on the profits of railway corporations, and they 
are authorized to assess this tax on the fund out of which 
dividends are paid to stockholders. In a sense the stock- 
holders are taxed on their income, for it would be pre- 
sumptively larger if there were no tax, just as it would 
be larger if their other taxes were removed; but the tax 



154 THE METHODS OF TAXATION 

is evidently on the business of transportation, and we can- 
not assume that it will be paid out of the income of rail- 
way stockholders, and not out of that of those who buy 
transportation of the railways. 

]STo doubt it will be observed that a tax on the profits of 
an individual may be transferred to others, and the con- 
clusion may be drawn that the distinctions pointed out 
above are immaterial. But this conclusion is incorrect; 
for the profits of an individual are what he receives from 
every source of revenue. To tax his profits is therefore 
to tax his whole net income; but to tax his rents in the 
hands of one person, his interest in the hands of another, 
his salary in the hands of a third, may be to lay a tax 
on him that has no relation to his net income. He may 
have incurred losses which leave him with no net in- 
come; but these taxes continue. They should not be 
called income taxes, because the income has disappeared. 
The income of a banker is not measured by the quan- 
tity of money that comes in to his till. That will run 
into the millions, while his true income may be but a few 
hundreds, or even less than nothing. Like all common 
words, the word " income " is loosely used ; but in esti- 
mating the financial position of any one it is his net in- 
come that is considered. He may have large revenues from 
some sources ; but he may be losing money in other enter- 
prises, and it is only after striking a balance that we can 
be said to know what his income really is. If an English- 
man has no revenue except from land, and is engaged in 
no business, the tax on rents is a tax on his income. The 
same would be true in the case of interest and salaries ; but 
it ceases to be true whenever the fluctuating element of 
profit and loss is introduced. 



INCOME TAXES 155 

These distinctions are substantially recognized in the 
English law. In view of the inequality of sacrifice caused 
by taxing incomes without regard to their permanency, 
or to the differences in the amounts of the necessary ex- 
penses of the recipients, that law provides that incomes 
less than £160 shall not be taxed, and that incomes less 
than £700 shall be allowed a partial exemption. There 
are five divisions or schedules under which income is 
assessed. Schedule A applies to income drawn from the 
ownership of dwelling houses and agricultural land, the 
tax being deducted from the rent by the tenant, if any, and 
paid by him to the tax gatherer. The landlord, therefore, 
has no control over this payment. Schedule C covers in- 
come from government securities payable in England. The 
tax is to be deducted, in most cases at least, from the 
income before it is paid to the owner of the securities. 
Schedule E relates to salaries and pensions paid by gov- 
ernment or other corporations, the tax on which is de- 
ducted before payment. Schedule B applies to the profits 
of farmers, their profits being arbitrarily assumed to be 
a certain proportion of their rent. In this case the farmer 
pays his own tax, but it is not properly an income tax, 
since he may not even make the rent out of the farm. 

It is only under Schedule D that an income tax, strictly 
denned, is levied; and much of the taxation even under 
this schedule is not of this description. The railways and 
other corporations are taxed under this schedule on their 
earnings, and they therefore deduct the tax from the divi- 
dends payable to their stockholders, without consultation 
with the latter. It is only the income derived from trades, 
from professions, and from loans and miscellaneous invest- 
ments, that is, strictly speaking, subject to income tax in 



156 THE METHODS OF TAXATION 

England. All other revenue, practically, is taxed before 
it reaches the owner, and is generally discoverable by the 
method of inspection. 1 The true profits, or actual net 
income, of any one engaged in business for himself, or 
managing his own property, can be known only to himself, 
and the assessor must in the main accept his figures. To 
put the matter in few words, other people may report to 
the assessor whatever sums they pay over to any person, 
and withhold a tax on such payments under the name of a 
tax on his income ; but it is only that person himself who 
knows what all these payments amount to, or how far they 
are offset by losses, and it is, therefore, only he that can 
determine the true amount of his taxable income. Hence 
the English law requires from every person having an 
income of £160 a disclosure, or declaration, of the state of 
his affairs. It very wisely does not require this statement 
to be sworn to ; nor is the penalty for making a false one, 
or for not making one at all, very severe. On the other 
hand, the revenue officers are sworn not to disclose the in- 
formation contained in these statements. 

The recognition of the distinctions above referred to 
appears in the provisions for determining exemptions and 
abatements. The government, as we have seen, imposes 
a tax on revenue from certain sources before it reaches the 
owner, and without reference to the amount of his income. 
But it also provides that incomes below specified figures 

1 It is computed that from three-fourths to four-fifths of the tax is 
collected before the income reaches the owner. The Commissioners esti- 
mate that of the gross income in 1901-02, under Schedule D, Public 
Companies, Local Authorities, and Banks paid on £270,000,000, leaving 
for self -assessment by persons and firms £218,000,000. As some of this 
can be verified, the amount self-assessed and therefore subject to eva- 
sion is about £150,000,000. As to this, "grossly insufficient returns, or 
no returns at all, are made over long periods of years with impunity." 



INCOME TAXES 157 

shall not be taxed, or be taxed at a lower rate than that 
imposed on larger incomes. Hence, in order to obtain the 
exemption to which he is entitled by law, but of which 
the law has deprived him, the owner must resort to pro- 
ceedings against the government. He may have made a 
return of his income, under Schedule D, but he must make 
another return in order to recover income intercepted be- 
fore it reached him, and this return must state the amount 
of tax deducted from every item of revenue. These pro- 
ceedings are so complicated as to be beyond the compre- 
hension of many persons, and the aid of lawyers, or those 
familiar with the practice, must be secured. 1 In numerous 
cases the expense of obtaining redress more than balances 
the amount of the possible recovery, and the government 
thus derives a considerable revenue from those whom it 

1 The forms sent out by the Inland Revenue Commissioners are ad- 
mitted to be perplexing. In criticising them, one of the Committee on 
the income tax made use of the following expressions: "I confess for 
my part that the ordinary form which an income taxpayer has to fill up 
is most confusing ; it puzzles me often. . . . Number 3 seems to be ex- 
pressed in very legal phraseology which may be quite incomprehensi- 
ble to an ordinary man. ... So smothered in verbiage that it is 
difficult for an ordinary taxpayer to understand. . . . Many persons 
have been paying income tax without being really liable." 

Persons in trade were, before 1907, assessed on their average income 
for three preceding years. The labor involved in ascertaining this av- 
erage is necessarily very great, and small tradesmen are often not capa- 
ble of the necessary bookkeeping. It is the opinion of many of the ex- 
perts in the Commissioners' office that the "average" is seldom brought 
into play to swell the profits of the years preceding the assessment, 
though it is brought into play to cut those profits down. The Com- 
missioners' solicitor pronounces this an understatement. It may be 
added that in order to obtain a reduction, the taxpayer must send to the 
revenue officers all his receipts showing the payment of dividends, rents, 
etc., which have to be examined at the London office or verified by the 
surveyor. The amount of clerical labor involved in such proceedings 
is only imperfectly suggested by the circumstance that the number of 
claims for repayment is about 450,000 every year, while the number of 
abatements is nearly 700,000. 



158 THE METHODS OF TAXATION 

professes to exempt, but whose income it has, contrary to 
its professions, subjected to taxation. It thus inflicts an 
injustice of the same nature as that arising under the 
assessment of personal property in the City of New York. 

It is of course impracticable to determine the pecuniary 
loss to taxpayers through overpayments, and because of 
the expense of the proceedings to correct their assessments 
and to obtain the restitution of money of which the tax- 
gatherers have deprived them. Some evidence, however, 
may be gathered from the existence of concerns formed 
for the purpose of procuring such redress. Nearly one 
hundred such agencies are registered at the Inland Keve- 
nue department, and their usual charge is one-third, or 
one-half, the amount recovered. The business of these 
agencies, however, is almost entirely derived from claim- 
ants residing abroad. There were formerly very few such 
claimants. In 1887 the number had risen to one thou- 
sand, and in 1903 to twenty thousand. The enormous 
increase of the tax no doubt had drawn the attention of 
the taxpayers to the importance of asserting their rights, 
and the advertisements of the agencies had doubtless had 
an effect. Probably the expense to residents, who gen- 
erally employ their own solicitors, may have been less in 
proportion than that incurred by nonresidents, but it 
must be in the aggregate very large. Persons of intelli- 
gence and leisure, and concerns having competent book- 
keepers, may dispense with legal aid; but large concerns 
frequently employ actuaries — a class of persons not much 
less expensive than lawyers — to attend to their assess- 
ments and maintain their rights. 

There are manuals published, professedly intended to 
aid taxpayers in obtaining justice; but the mental ap- 



INCOME TAXES 159 

plication required to comprehend these manuals is for 
most persons too severe. Without putting a pecuniary 
value on the enormous aggregate of vexation and wasted 
time involved in the proceedings, it is perhaps a not 
unreasonable guess — for we can only guess — that the 
total cost to taxpayers of obtaining, or of failing to obtain, 
the repayments to which they are legally entitled, is not 
less than half the amount recovered. This amount has 
in recent years risen to some £2,700,000, the number of 
repayments being nearly four hundred and seventy-five 
thousand. 

It is supposed that the great majority of taxpayers are 
entitled to exemption, but many of them are ignorant of 
their rights, and would be unable to enforce them, even 
if they knew what they were. Small tradesmen often do 
not attempt to make returns, probably because their ac- 
counts are so imperfect as to render it hard for them to 
tell what their income really is. In such cases the as- 
sessors usually " doom " the taxpayer, who submits to the 
assessment unless it is too oppressive. It seems that about 
one-fifth of those assessed under Schedule D are " doomed." 
While poor men may submit to this because they cannot 
help themselves, it is obvious that many rich men, as in 
this country, may prefer the chance of having the assessor 
underestimate their resources to the certainty of having 
to pay taxes on all the wealth that they disclose ; and the 
English commissioners complain of the extent of this 
practice, 1 

1 Sir W. Harcourt said, in his budget speech, in 1894: "Many people 
are in a happy ignorance of the Income Tax which they pay. I wish 
there were more of them. Even in the case of trades and professions 
where you require a declaration of a man's profits you do not attempt 
an investigation of the income the individual derives from other sources. 



160 THE METHODS OF TAXATION 

What might be called the reductio ad absurdum of the 
principle of exemption occurs in the case of the coopera- 
tive trading societies. These societies, like other concerns 
engaged in selling goods, make profits on the capital em- 
ployed; but these profits are distributed among their 
members as " bonuses," or by means of reduced prices. 
They are exempt from income tax, to the extreme dis- 
pleasure of all the tradesmen who carry on their business 
in the usual manner. It seems clear that whether capital 
is employed in the one way or in the other, a profit is 
made ; it is the same thing when a man gets his groceries 
at a discount as when he receives a dividend in cash. 
Furthermore, many of these societies sell goods at current 
prices to non-members, whereby the profits of members 
are enlarged. Even when this practice does not prevail, 
it is hard to see why the members of these societies are 
not really partners in a joint stock enterprise carried on 
for profit, and therefore as properly liable to income tax 
as persons receiving an income from other investments. 
Their exemption is defended on the ground that they are 
with few exceptions men of very small means, whose in- 
comes would be below the taxable limit. If any part of 
such income were intercepted it would have to be re- 
turned ; a proceeding which on account of the large num- 
ber of the members of these societies — probably more 
than two millions — would cause an immense deal of 
trouble and expense. This is true; but it is not true of 

I have made a careful investigation of this matter in consultation with 
the authorities of the Inland Revenue, and they are strongly of opinion 
that the measures of penal discovery and irritating inquisition which 
would be involved in any plan which required the determination of 
every man's income from all sources would render the collection of the 
Income Tax so odious as to imperil its existence, and in all probability 
make it impossible to maintain the tax." 



INCOME TAXES 161 

the cooperative societies alone. The difficulty admitted 
here to exist is not peculiar to this case; it necessarily 
arises if the principle of intercepting income and then 
repaying it is adopted at all. 

What is known as the income tax in England thus ap- 
pears to consist in part of an income tax proper, but 
chiefly of taxes on rents, on the earnings of corporations, 
on most forms of credit involving the payment of divi- 
dends or interest, and on disbursements for salaries and 
pensions. It is obvious that these taxes are assessed with 
very unequal degrees of certainty. The tax on consols, or 
the funded debt of England, is determinable with as much 
accuracy as the interest payable thereon. The tax on pen- 
sions is equally certain, and so is the tax on the salaries 
of public officers, and on those of officers of public com- 
panies. The tax on the earnings of such companies, owing 
to the necessary publicity of their accounts, is probably 
assessed with a high degree of certainty. The tax on rents, 
the contract of leasing being generally written and in the 
possession of both parties, is also assessed with much 
certainty ; and occupying owners may be assessed by anal- 
ogy. The tax on colonial and foreign loans, payable 
through agents in England, is precisely determinable. The 
tax on foreign investments and on miscellaneous credits 
is very uncertain in its assessment, as it depends largely 
on disclosures by interested parties. The tax on profits is 
of course even more unequal. 1 

1 The official returns of the Commissioners of Inland Revenue give 
some idea of the degree of inequality which prevails. The inequality 
due to allowances for abatements and deductions may be first examined. 
The annual value of lands in the year 1895 was 55.4 millions of pounds, 
as compared with 67 millions twenty years before. The annual value 
of houses was 154.5 millions in 1895, and about 97 millions in 
1875. The sum of these values in 1876 was 174.2, with deduc- 

11 



162 THE METHODS OF TAXATION 

The inequality arising from the failure to assess all 
income from foreign investments has been specifically rec- 
ognized by a statute passed in 1885, which declares that 
previous laws had been found " inadequate to secure the 
charging and payment of income tax upon dividends pay- 
able out of the revenues of foreign and colonial states and 
dividends of foreign and colonial companies." As the 
law now stands all persons entrusted with the payment 
of returns from any foreign investments are commanded, 
under penalty of a fine of £100 for any failure, to de- 
liver to the Board of Inland Kevenue a complete account 
of such payments. Any one acting as a banker who shall 
sell or otherwise realize coupons, or warrants, or bills of 
exchange for dividends, and pay over the proceeds to any 
person, or credit him therewith, is within the statute. So 
is any person who by like means obtains payment of divi- 
dends for another without the Kingdom. A dealer in 
coupons who buys from any person not a banker or a 
dealer is also covered by the statute. A pecuniary re- 



tions amounting to 13.1, leaving a net assessment of 161.1 million 
pounds. In 1895 the gross assessment was 210.6 millions, the number 
of separate properties assessed being 9,248,000, but the deductions were 
50.9 millions, leaving a net assessment of 159.7 millions; which signifies 
that taxable income from this source has decreased in the course of 
twenty years, and that decrease has since continued. The profits of 
farmers should have decreased in the same proportion as the annual 
value of lands ; but owing to increased deductions and lower prices for 
their products, the decline is greater. 

In 1870 salaries and pensions amounted to 29.9 millions, with de- 
ductions of 2.2 millions. In 1895 they amounted to 51 millions, 
but the deductions were 16.7. The salaries doubled, but the taxable 
income from this source increased only one-half. In 1905 the number 
of salaries assessed under Schedule E was about 370,000* the amount 
being about 86 millions. To this must be added about 100,000 salaries 
assessed under Schedule D, amounting to about 23 millions, the 
deductions being over 36 millions. 



INCOME TAXES 163 

numeration is allowed to bankers and others complying 
with the statute, the allowance not being less than three- 
pence in the pound of the amount of tax collected. Before 
this statute was passed there seems to have been no tax 
collected from income in the shape of coupons, but in 
1886 income from this source amounting to 5.8 millions 
of pounds was disclosed, and it has since risen to over 
10.7 millions. It would seem, therefore, that before this 
statute was passed, some of the recipients of income of 
this description may have failed to disclose its existence; 
although doubtless much of it was returned as profit. 1 

Had it not been for the increased assessment under the 
statute of 1885, the income from English investments in 
foreign countries assessed under Schedule D would have 
risen only from 13.7 to 22.5 millions, between 1884 and 
1895 ; and it amounted in the latter year to less than 
30 million pounds. To this may be added income from 
loans to foreign and colonial governments and from Indian 
railways, assessed at about 24 million pounds, making a 
total of 54 millions. But in 1882 a very high authority, 
Mr. Robert Giffen, computed the income from foreign 
investments at 75 millions. The assessment was then 30 
millions. Mr. Giffen made another computation in 1885, 
according to which the foreign revenue was then 85 mil- 
lions. In 1895 it is highly probable that it was much more 

1 Judging from the aversion of the English taxpayers to the income 
tax, it seems probable that much evasion would take place under this 
head if it were practicable. That it is practicable is admitted by the 
Secretary of the Board of Inland Revenue. He testifies : "If a person 
receives an open cheque or draft payable through a banker upon 
which there is no visible evidence that it is in payment of a dividend, 
we cannot put the banker into the position to determine and decide 
whether it is income or not. In such cases we are dependent entirely 
on the return made by the recipient." 



164 THE METHODS OF TAXATION 

than 100 millions, and perhaps twice as much as its as- 
sessed value. 

If we compare the returns under Schedule D, we observe 
that the increase in the income from trades and profes- 
sions, which is ascertained by the method of disclosure, 
is very small, while the increase of income from public 
companies, whose accounts are open to inspection, is very 
large. In 1870 the income from trades and professions 
was assessed at 131.8 millions, subject to deductions 
amounting to 12.9 millions, or a net assessment of 118.9 
millions. In 1895, the gross assessment was 170.3, the 
deductions 49.3, and the net assessment 121 million 
pounds, a gain of about two millions in twenty-five years. 
But some uncertainty affects the item of deductions, owing 
to changes in the law, and other causes. The gross as- 
sessment of public companies, etc., however, rose from 
97.2 millions in 1885 to 151 millions in 1895, a gain of 
nearly 54 millions in ten years. This was from domestic 
sources only; including foreign sources the amounts 
would be 111 millions, and 177 millions. In 1900 the 
increase in the income of trades and professions during 
the previous decade was found to be about one-tenth of 
the increase in the income of public companies. In 
1903-04, this income, taking the gross figures, had come 
to exceed that of trades and professions by one-sixth. 
But the deductions had become so large as to make it 
probable that the net income from trades and professions 
had actually decreased. Doubtless the incorporation of 
many firms accounts to a considerable extent for this 
phenomenon ; but it tends to confirm the charge that eva- 
sion is extensively practiced where it is practicable. Al- 
though such evasion is complained of by the Board of 



INCOME TAXES 165 

Inland Revenue, the commissioners charged with the as- 
sessment of this tax belong to the propertied class, and 
the active officers are superior to the ordinary functionary 
of this kind elsewhere, so that collusive under-assessment 
is not believed to prevail. 

While the evidence points strongly to the conclusion 
that, under the English system as well as in this country, 
gross injustice is caused by imposing taxes on property 
at valuations ascertained by the method of disclosure, it 
may seem not altogether convincing. It happens, how- 
ever, that revelations have been made which put the matter 
beyond question, the evidence having been furnished by 
the highest authority. In his budget speech in 1853 
Mr. Gladstone said: 

" I will state what happened in a great town where a new 
street was to be built. The persons who lived and carried on 
business in the old street, which was pulled down to make way 
for the new one, had been charged at a certain amount to the 
income tax. They had also, of course, made returns at a cer- 
tain amount under the income tax. When the new street came 
to be built, they claimed compensation for the loss of their 
business. Twenty-eight persons in all claimed the sum of 
£48,159 as compensation for their profits for a single year. 
But what was the amount at which they had returned their 
profits for assessment to the income tax? They claimed 
£48,000; they got from the jury nearly £27,000; but the 
return of profits for assessment to the income tax which they 
separately made had amounted only to £9,000. Frauds of this 
kind, and in many other cases, do exist ; they are inseparable 
from the character of the impost, human nature remaining as 
it is." 

In their valuable report rendered in 1870, the Commis- 
sioners state that they have often called attention to the 



166 THE METHODS OF TAXATION 

large evasions practiced under Schedule D by means of 
fraudulent returns, and continue : " It was not, however, 
until recently that we were enabled to form a reliable 
estimate of the loss which the revenue sustains in this 
way. An extensive demolition of houses by the Metro- 
politan Board of Works gave rise to a great number of 
claims to compensation. Two hundred of these were ex- 
amined by our officers, and in eighty cases surcharges were 
made and sustained on appeal — that is to say, in 40 per 
cent of the cases inquired into, the revenue had been de- 
frauded of its dues. The aggregate of the taxable incomes 
returned by the parties themselves was £73,642, and the 
amount ultimately found to be correct was £171,370, being 
in excess of the returns by £97,728, or about 130 per 
cent." 

The commissioners further explained that this was not 
an exceptional case. " As an invariable consequence of 
claims for compensation, where the actual profits of trades 
or professions are divulged, we find the income tax re- 
turns largely deficient. And, moreover, this is not con- 
fined to any particular class, trade, or profession; we 
find the same practice prevailing among legal practitioners, 
when on the abolition of their exclusive privileges in some 
particular Court they have to make good their claims to 
your Lordships; we find it on all occasions of large de- 
molition of shops and warehouses for public purposes, 
in every variety of trade, and we find it in great public 
companies and in firms whose business is almost a national 
concern, from its magnitude and world-wide reputation; 
we therefore think that we may venture to generalize upon 
the facts which the most recent occasion of compensation 
cases has furnished." The conclusion reached was that 



INCOME TAXES 167 

130 per cent was rather an understatement of the extent 
to which the returns ought to be increased. 

This statement indicates that about 40 per cent of those 
who paid income tax returned their income at little more 
than one-third of its amount. Supposing the income of 
the other 60 per cent of the taxpayers to have been re- 
turned at its full value, they would have paid at nearly 
three times the rate paid by the others. In view of the 
moderate rate of the tax at the period in question — 
amounting only to about one-fiftieth of the income — the 
aversion to the tax on the part of the English tradesmen 
appears to Americans of the present generation rather 
extreme. The property tax here frequently amounts to 
more than a fiftieth of the gross value, and is perhaps 
generally equivalent to an income tax of one-tenth to 
one-fifth. With an income tax in 1902 of fifteen pence 
in the pound, or more than three times what it was in 
1870, it has seemed probable that the discrepancy then 
existing was materially, if not correspondingly, increased. 
In fact the complaints became so serious as to lead in 
1904 to investigation by a Parliamentary committee. The 
proceedings of this committee were not all public, but the 
testimony taken seems to sustain the complaints. It was 
perhaps thought unwise to explain to the taxpayers, as 
was done in 1870, the methods by which evasion is prac- 
ticed, or to dwell upon the injustice of a tax which dis- 
criminates in favor of the less scrupulous trader. The 
report of the committee, however, shows great reluctance 
to resort to more inquisitorial methods than are now em- 
ployed, and the changes that they have to suggest are not 
of a nature to remove the fundamental objections to the 
method of self-assessment, or disclosure. What the report 



168 THE METHODS OF TAXATION 

especially illustrates is the enormous loss by friction caused 
by the practice of collecting taxes from those who are not 
taxable, and then undoing this complicated proceeding. 
The cost of collecting taxes will be considered later; but 
a few words on the situation in England may be here 
introduced. 1 

1 Sir Charles Dilke, the chairman, speaks of "the formidable evi- 
dence enforcing the necessity for universal declarations which came 
before this committee, and was not allowed to be published." The 
evidence was suppressed because it seemed "to involve the possible 
use of names which it might be undesirable to give in public, or of sys- 
tems of evasion which it might be wise not to call too much attention 
to." It appeared that "enormous evasions of the income tax" took 
place, that "an enormous amount of property escaped," etc. In con- 
sequence of this report, the law was altered in 1907, so that every one 
who receives a notice from the Inland Revenue Board — 600,000 are 
sent out — must make a return of his income, even if it is nil, under 
penalty of a fine. This will subject perhaps 200,000 people to vexation, 
because some of their number have been negligent or dishonest. The 
penalties for making incorrect returns have been increased, and the 
period during which the government can recover extended. All em- 
ployers must give the names and salaries of their employees. The 
abatement allowed at the end of a year when the profits fell below the 
average of the three years preceding is to be done away with. The 
abatement of 3d. on earned incomes is to be granted only to those who 
make out a full statement of all their income; it being thought that 
many persons who do not now make returns would be led to do so for 
the sake of the abatement. The evidence taken by the committee 
proves that the high tax of recent years has not only produced a very 
large number of claims for repayment from nonresidents, but has also 
caused an enormous increase in all sorts of claims. "People who con- 
sidered it hardly worth their while to trouble about making claims 
when the tax was at 8d. did think it worth while when the tax was Is." 
It is to be observed that when a marriage takes place, the incomes of 
the husband and wife (with some allowance for the separate earnings 
of the wife) are added for purposes of taxation. Both may have en- 
joyed exemptions or abatements before their union, which they now 
lose. It is obvious that this constitutes a discouragement to legitimate 
sexual connections which may have evil effects on the institution of the 
family. The changes in the income tax have been as follows : From 
1842, when the tax was reimposed, to 1852, all incomes over £150 were 
charged at Id. in the pound without any abatement. From 1853 to 
1862, incomes over £100 were charged, but at a less rate than those 



INCOME TAXES 169 

Beckoning as naught the aggregate of vexation and waste 
of time, it seems doubtful if the various abatements and 
exemptions allowed constitute a material gain to the com- 
munity. The expenses of the Board of Inland Revenue, 
although the commissioners for assessing the tax serve 
without pay, are perhaps not far from eight per cent of 
the amount of income tax collected. The number of abate- 
ments of £150 allowed because the income is between 
£160 and £400 is now over 600,000, and their amount 
nearly £100,000,000. The number of incomes in this class 
is more than four-fifths of the whole number, and their 
amount is seven-twelfths of the whole assessment to per- 
sons. Taking everything into account, it is far from im- 
probable that the total burden imposed by this complicated 
system, by which the government takes more than its due 
from its subjects, and returns a part of it to them, after 
long delay, when compelled to do so by the employment 
of a cumbersome and perplexing procedure, more than 
counterbalances the relief afforded by the partial exemp- 
tion of small incomes. Public companies, etc., having 
incomes of more than £5,000 number 5,500 and are one- 
fourth of the whole number. They have incomes amount- 
ing to some £231,000,000, or more than nine-tenths of 
the income of this class. The number of firms having in- 
over £150. From 1863 to 1871 an abatement of £60 was allowed on 
all incomes between £100 and £200. From 1872 to 1875 the abatement 
was £80, allowed on incomes up to £300. From 1876 to 1893 incomes 
below £150 were exempted, and the abatement was £120 on incomes 
below £400. From 1894 to 1897 incomes below £160 were exempt, 
incomes below £400 were allowed an abatement of £160, and incomes 
below £500 an abatement of £100. Some abatement was also allowed 
for the separate earnings of wives. In 1898 incomes between £400 and 
£500 had an abatement of £150, between £500 and £600 an abatement 
of £120, and between £600 and £700 an abatement of £70. In 1907 
an abatement of 3d. was allowed to "earned " incomes under £2,000. 



170 THE METHODS OF TAXATION 

comes over £1,000 is about 15,500, or more than one- 
third of the whole number, with income amounting to five 
times that of the small firms. Were the whole machinery 
employed in the assessment and collection of the income 
tax swept away, excepting what was needed for collecting 
the tax from large firms and corporations, the saving 
would very soon, it seems possible, make up for the tem- 
porary, and largely nominal, increase in the burdens of 
those interested in these firms and corporations. 

The evidence offered by the Board of Inland Revenue, 
and abundantly corroborated by private persons, together 
with our experience of the evils of the method of dis- 
closure in this country, seems to make it unnecessary to 
present anything further in order to sustain Mill's con- 
clusion that the income tax, on whatever principles of 
equality it may be imposed, is in practice unequal in one 
of the worst ways. In this conclusion Mr. Gladstone 
concurred, and he came near to extinguishing the tax; 
but the Crimean War, in the first place, and his failure 
to carry the country, at the election in 1874, prevented 
him from effecting his purpose. As the tax is apparently 
paid by a small number of rich people, it would perhaps 
be idle to expect that the mass of the citizens should con- 
cern themselves much as to its justice, and it will prob- 
ably remain a feature of the English fiscal system for an 
indefinite period. But unless human nature should change, 
such a tax must enable dishonest, unscrupulous, and astute 
men to remove burdens from themselves and place them 
upon the helpless and the conscientious. Those who are 
unwilling to make false statements are thus in many cases 
driven out of business; and while at the perjuries of 
taxpayers, like those of lovers, Jove may laugh, the prac- 



INCOME TAXES 171 

tices inseparable from the application of the method of 
disclosure tend to lower the tone of the business world, 
and to force the direction of industrial affairs into the 
hands of men who have little scruple at defrauding or 
corrupting those with whom they deal, whether they be 
private citizens or revenue officers. The extent to which 
collusion with these officers prevails cannot be determined, 
but we know that it exists in our country, and that it must 
always be possible where the method of discovery is em- 
ployed. This method seems to be as incompatible with 
justice when income is taxed as when personal property 
is assessed, and as it is impossible to assess incomes with- 
out resorting to it, it follows that the income tax cannot 
be favored by those who regard justice as an end in 
taxation. 



CHAPTER VI 

TAXES ON EXPENSE 

Since the application of the proportionate method, either 
by means of disclosure or through inspection, seems neces- 
sarily to violate the recognized principles of justice, we 
might conclude that the method could not be applied at all. 
There is, however, a conceivable escape from this conclu- 
sion. Even if we cannot ascertain the amount of wealth 
owned by the individual subject, nor the extent of his 
income, it may be possible to discover these quantities 
through some process of inference. Income is received in 
order to be spent, for the most part ; and it is conceivable 
that this expenditure may be measured by the sovereign, 
and that taxation levied upon it may constitute in effect a 
proportionate, or even a progressive, income tax. In other 
words, while we cannot learn the amount of a man's income, 
we may learn the amount of his outgo, and, by taxing the 
objects for which he disburses his money, may succeed in 
compelling him to contribute to the support of the govern- 
ment in proportion to the revenue that he enjoys under its 
protection. 

If we examine the English revenue system, we observe 
that it has been deliberately framed in conformity with 
some such theory, and that it is intended to equalize the 
sacrifices of the subjects. Several causes have operated to 
produce this result. The insular position of the British 
Isles has made the collection of duties on imported goods 
much simpler and more effective than elsewhere. The 



TAXES ON EXPENSE 173 

general government has had far more authority than that 
of the United States, compared with the local governments, 
while the territory covered is so small as to enable it to 
act with much greater efficiency. What is of a great deal 
more importance, the government has frequently been 
directed by men acquainted with the lessons of political 
science, and disposed to regard them in the laws which they 
made and in the administration of those laws. There are 
clear traces in the English system of the influence of Adam 
Smith and J. S. Mill; both men of great learning and 
unusual powers of reasoning, who were sincerely concerned 
in bettering the lot of the weaker and humbler members of 
human society by relieving them from those burdens with 
which that society had aggravated the inequalities of 
nature. 1 They were aware, withal, that as it was impos- 

1 Even in the eighteenth century, some features in the system of 
taxation in England seemed to discriminate in favor of the poor. Arthur 
Young, addressing a French audience at the beginning of the Revolution, 
said: "We have many taxes in England which you know nothing of 
in France, but the Tiers Etat — the poor — do not pay them. They 
are laid on the rich. Every window in a man's house pays, but if he 
has no more than six windows he pays nothing. A seigneur with a 
great estate pays the vingtiemes and tallies, but the little proprietor of 
a garden pays nothing. The rich pay for their horses, their carriages, 
their servants, and even for liberty to kill their own partridges; but 
the poor farmer pays nothing of this; and, what is more, we have in 
England a tax paid by the rich for the relief of the poor." Pinkerton's 
Voyages, IV, 200. Tocqueville declared that "for centuries the only 
inequalities of taxation in England were those which had been succes- 
sively introduced in favor of the necessitous classes. ... In the 
eighteenth century it was the poor who enjoyed exemption from tax- 
ation in England, in France it was the rich. In the one case, the aris- 
tocracy had taken upon its own shoulders the heaviest public charges 
in order to be allowed to govern. In the other case, it retained to the 
end an immunity from taxation in order to console itself for the loss 
of government." L'Ancien Regime, 146. These statements give but a 
partial view of the situation, and it would be easy to show that the lot 
of the English poor was not ideal. But compare Lecky, Democracy 
and Liberty, I, 337, seq. 



174 THE METHODS OF TAXATION 

sible for the officers of government to know the pecuniary 
circumstances of every subject, no system of taxation based 
on the supposed possession of such knowledge could pos- 
sibly, unless by chance, be just. 

These writers, and we may say economists in general 
before the present generation, were much influenced by the 
theory of the division of revenue into rent, profit, and 
wages. This seemed to point to a tripartite division of 
mankind into landlords, capitalists, and laborers ; the im- 
plication being that the classes were mutually exclusive, 
although the incorrectness of this assumption was generally 
understood. Now the very act of classification eliminates 
individual differences, and if there are really three eco- 
nomic classes, the problem of taxation becomes enormously 
simplified. Instead of having to find out the condition of 
every individual human being, the legislator needs only to 
determine the circumstances of a large class, every member 
of the class being by hypothesis in like condition with every 
other. With this hypothesis it became possible to bring 
Political Economy to a high degree of perfection, and much 
of Ricardo's reasoning is essentially mathematical. It is 
true that any change in the condition of one class reacts 
on the others, and the analysis of these reactions was also 
carried to great completeness; but the main assumption 
was unaffected. 

Although Adam Smith had explained that wages de- 
pended partly on the demand for laborers, and partly on 
the cost of provisions, the researches of Malthus had the 
effect of attracting attention to the latter cause, and led 
some economists to dwell on it with rather exaggerated 
emphasis. A popular impression was thus created that 
laborers as a class multiplied at such a rate as to keep their 



TAXES ON EXPENSE 175 

standard of living so low that they would suffer severe 
privation if their supply of provisions was reduced. Ac- 
cording to this view, when the cost of food declined, laborers 
took advantage of the plenty, and increased in number till 
their increased consumption brought them back to their 
former level. The increased consumption of bread would 
require a greater acreage of wheat, which could be obtained 
only by bringing less productive land under cultivation. 
Since this land should yield the ordinary profit to capital, 
the better land would yield a higher profit, which would 
tend to be appropriated by the landlords in the form of 
higher rents. In so far as these tendencies prevailed, the 
condition of laborers was fixed, and their standard of 
living might be not much above that of cattle. 

It is lamentably true that in some parts of Europe, and 
perhaps in the British Isles, the food of many laborers 
was formerly little better than that of the beasts which they 
tended, their shelter was hardly superior, and their cloth- 
ing was a poor substitute for the integuments provided by 
nature for the horse and the sheep. It was at that time 
obvious that human beings in such poverty could pay little 
in the shape of taxes; and this inference continued to be 
drawn after the facts on which it was based had been 
altered. Any tax levied on wages already at the minimum 
needed for subsistence must either compel an increase in 
these wages — at the expense, according to Adam Smith, 
of landlords and consumers of manufactures, but really, 
as Ricardo showed, of profits — or cause the number of 
laborers to decrease through starvation. The wealthier 
classes were therefore appealed to by the economists not 
to injure their own interests by laying taxes on the neces- 
saries of life, and this argument had much influence in the 



176 THE METHODS OF TAXATION 

struggle for the repeal of those taxes on imported food 
known as the Corn Laws. It was much easier to convince 
the capitalists than the landlords, as their interest in having 
cheap food for their workmen was direct, while the land- 
lords could not understand why the repeal of the corn laws 
would not lower their rents; but eventually there was a 
substantial acquiescence in the view that taxes on food 
were objectionable in their effects on all classes. 

It should be remembered, however, that Adam Smith 
had demonstrated, with his usual thoroughness, that the 
condition of laborers when he wrote had been raised much 
above the deplorable standard above described; and in 
spite of the frightful cost of the wars with Napoleon, 
that condition probably continued to improve. Many 
things beside food, Smith pointed out, are required by 
common laborers. It is worth while to repeat his words : 
66 By necessaries I understand, not only the commodities 
which are indispensably necessary for the support of life, 
but whatever the custom of the country renders it indecent 
for creditable people, even of the lowest order, to be with- 
out. A linen shirt, for example, is strictly speaking not 
a necessary of life. The Greeks and Romans lived, I sup- 
pose, very comfortably, though they had no linen. But in 
the present times, through the greater part of Europe, a 
creditable day-laborer would be ashamed to appear in pub- 
lic without a linen shirt, the want of which would be sup- 
posed to denote that disgraceful degree of poverty, which, 
it is presumed, nobody can well fall into without extreme 
bad conduct. Custom, in the same manner, has rendered 
leather shoes a necessary of life in England. The poorest 
creditable person of either sex would be ashamed to appear 
in public without them. In Scotland, custom has rendered 



TAXES ON EXPENSE 177 

them a necessary of life to the lowest order of men; but 
not to the same order of women, who may, without any dis- 
credit, walk about barefooted. In France they are neces- 
saries neither to men nor to women; the lowest rank of 
both sexes appearing there publicly, without any discredit, 
sometimes in wooden shoes and sometimes barefooted. 
Under necessaries therefore, I comprehend, not only those 
things which nature, but those things which the established 
rules of decency, have rendered necessary to the lowest 
rank of people. All other things I call luxuries ; without 
meaning by this appellation to throw the smallest degree 
of reproach upon the temperate use of them. Beer and 
ale, for example, in Great Britain, and wine, even in the 
wine countries, I call luxuries. A man of any rank may, 
without any reproach, abstain totally from tasting any such 
liquors. ^Nature does not render them necessary for the 
support of life, and custom nowhere renders it indecent for 
people to live without them." 

It follows, Adam Smith concluded, that as a tax on the 
necessary articles of subsistence raised their price, it must 
correspondingly raise wages. The laborer must still be able 
to purchase those things which it would be indecent for him 
to go without. But it is otherwise with taxes on luxuries ; 
the rise in their price will not necessarily occasion any rise 
in the wages of labor. A tax on tobacco, for example, 
though a luxury of the poor as well as of the rich, will not 
raise wages. A tax of three times its original price in 
England, and fifteen times in France, seemed not to affect 
wages. So of the taxes on tea and sugar, which had become 
luxuries of the lowest order of people in England and Hol- 
land ; and so of the taxes on alcoholic liquors. " The rise 

in the price of porter, occasioned by an additional tax of 

12 



178 THE METHODS OF TAXATION 

three shillings upon the barrel of strong beer, has not 
raised the wages of common labor in London. They were 
about eighteen-pence and twenty-pence a day before a tax, 
and they are not more now." 

To these conclusions Adam Smith added certain others 
of very great importance. The sober and industrious poor, 
he declared, are disposed by sumptuary taxes to limit their 
expense for superfluities which they can no longer easily 
afford. But it is the sober and industrious poor who gen- 
erally bring up the most numerous families, and who prin- 
cipally supply the demand for useful labor. " All the poor, 
indeed, are not sober and industrious, and the dissolute 
and disorderly might continue to indulge themselves in 
the use of such commodities after this rise of price in the 
same manner as before, without regarding the distress 
which this indulgence might bring upon their families. 
Such disorderly persons, however, seldom rear up numerous 
families ; their children generally perishing from neglect, 
mismanagement, and scantiness or unwholesomeness of 
their food. If by the strength of their constitution they 
survive the hardships to which the bad conduct of their 
parents exposes them, yet the example of that bad conduct 
commonly corrupts their morals ; so that, instead of being 
useful to society by their industry, they become public 
nuisances by their vices and disorders. Though the ad- 
vanced price of the luxuries of the poor, therefore, might 
increase somewhat the distress of such disorderly families, 
and thereby diminish somewhat their ability to bring up 
children, it would not probably diminish much the useful 
population of the country." 

The foundation for a consistent, if not a scientific, sys- 
tem of taxation thus laid by Adam Smith was completed by 



TAXES ON EXPENSE 179 

his showing that it was indispensable, for purposes of rev- 
enue, to tax laborers. As he observed, " the whole con- 
sumption of the inferior ranks of people, or of those below 
the middling rank, ... is in every country much greater, 
not only in quantity, but in value, than that of the middling 
and of those above the middling rank. The whole expense 
of the inferior is much greater than that of the superior 
ranks. . . . The taxes upon expense, therefore, which fall 
chiefly upon that of the superior ranks of people, upon the 
smaller portion of the annual produce, are likely to be 
much less productive than either those which fall indiffer- 
ently upon the expense of all ranks, or even those which 
fall chiefly upon that of the inferior ranks; than either 
those which fall indifferently upon the whole annual prod- 
uce, or those which fall chiefly upon the larger portion of 
it. The excise upon the materials and manufacture of 
home-made fermented and spirituous liquors is accord- 
ingly, of all the different taxes upon expense, by far the 
most productive; and this branch of the excise falls very 
much, perhaps principally, upon the expense of the com- 
mon people." 

It should be added that liquors fermented or distilled, 
not for sale but for private use — as is now substantially 
the case in France — were not then subject to excise, the 
exemption being more to the advantage of the rich, who 
brewed their own beer, than of the poor, who bought theirs 
at the brewery or alehouse. This exemption from very 
heavy taxes which are paid by the poor laborer and arti- 
ficer, Smith declared, was very unjust and unequal, and the 
substitution of a duty on malt, which he demonstrated was 
fiscally preferable to the existing excise, was desirable as 
a social reform. 



180 THE METHODS OF TAXATION 

It is hardly too milch to say that the reconstruction of 
the whole fabric of English taxation according to the prin- 
ciples established by the great Scottish economist, is the 
most splendid instance in the history of the world of the 
application of reason in the affairs of government. Nor is 
it too much to say that the resulting system has been on the 
whole intended to conform to the demands of humanity 
commonly recognized by the English people. It ap- 
proaches, theoretically, nearer to perfection than any other 
system of taxation that has ever prevailed. It is true that 
the motives to which Smith appealed were not all of the 
most exalted character. The things necessary to the com- 
fortable subsistence of the poor were not to be taxed, be- 
cause the rich would have to pay the tax in the shape of 
increased wages ; but while to act according to selfish ad- 
vantage does not command our enthusiastic admiration, to 
follow the dictates of an enlightened self-interest is not 
easily to be distinguished from virtue. "When Smith wrote, 
not only was the bread of the laborer taxed, but four of the 
chief necessaries of his life; salt, leather, soap, and 
candles, as well as coals, wool, and other materials in com- 
mon use. All have been freed from taxation; and even 
sugar, which was called a luxury, was exempted in 1874, 
although this exemption has now ceased. On the other hand 
the taxes intended to fall on the rich have been retained; 
the house tax, the tax on armorial bearings, on carriages, 
on man-servants, on wines, on sporting. Even the railway 
passenger tax has been levied on travelers by first and sec- 
ond, but not by third-class carriages. On the whole, the 
theory of taxing classes of men is consistently applied. 
Landlords and capitalists pay taxes on rents and on income 
in general, and their estates are subjected to progressive 



TAXES ON EXPENSE 181 

death-duties. Laborers pay chiefly on what are called their 
luxuries — alcoholic drinks, tobacco, and tea ; and the 
rich are also taxed on their expense for such luxuries. 

Yet this inquiry is not primarily concerned either with 
the theoretical perfection, or the practical efficiency of any 
system of taxation. We have to determine how far taxa- 
tion can be shown on rational grounds to conform to recog- 
nized standards of justice, and we have already seen that 
the income tax is on such grounds indefensible. Further- 
more, the assumption on which the doctrine of economic 
classes is based must be submitted to the test of reason. 
Justice, it seems plain enough, has regard to individual 
persons ; when a man is compelled to submit to an exaction 
which causes him peculiar suffering, it is no answer to his 
complaint to tell him that he belongs to a class which does 
not suffer. Class is a general name; it denotes concrete 
individuals ; but the group in which they are conceived is 
a metaphysical entity, which is not to be confounded with 
the actual human being, or treated as if it were of the same 
order of existences. The doctrine of averages is of immense 
convenience in statistics; we may ascertain with some 
degree of accuracy the average height of the inhabitants 
of a country, or their average weight, or the average dura- 
tion of their lives. We may perhaps even learn their 
average intellectual capacity or moral purity. But we 
should obviously be guilty of the most cruel injustice if 
we were to estimate the virtue of an individual woman by 
any principle of averages; her chastity is not to be im- 
pugned because of the frailty of many of her sex. There 
may be an average percentage of dishonesty among serv- 
ants ; but this means only that some individuals are honest 
and some are not, and no one would accuse a faithful 



182 THE METHODS OF TAXATION 

domestic of stealing because of the doctrine of chances or 
general probabilities. 1 

These considerations cannot be ignored in taxation. If 
justice is to be attained it must be through equality of 
sacrifices by individuals, and the fact that the aggregate 
sacrifices of a great many persons divided by their number 
would give a certain average sacrifice on the part of each, 
is, so far as justice is concerned, immaterial. To maintain 
the contrary would be nearly as absurd as to insist that a 
man aged fifty must really be forty years old, because he 
belongs to a class of which that is the average age, or to 
treat a permanent invalid as shamming, because in the 



1 Mr. Gladstone's criticism of this doctrine deserves to be quoted. 
He said: "It is commonly stated that, though we cannot do justice 
to each individual, we may do justice as between classes; and that for 
this purpose we must take an average of each class within itself. Now, 
I question the doctrine of those who propose to do justice between the 
various kinds of income by establishing averages for each class within 
itself. ... In the name of reason and common sense, I ask how those 
who demand either equality, or an approach to it, can obtain it by 
averaging classes of income? Look at annuities. The tables give the 
value of female life at fifteen years of age at twenty-five years' purchase ; 
but go upwards to seventy or seventy-five years of age, and the value 
of the life is only five years' purchase : yet you propose to average, for- 
sooth, these dissimilar cases — to bring up the value of the five years' 
purchase and bring down the value of the twenty-five years' purchase 
to a common standard. What possible average can these interests 
admit of? A life of twenty-five years' purchase is five times the value 
of one of five years' purchase. Will it be any consolation to the life of 
five years' purchase, when called on to pay three times as much as he 
ought, on the principles of the reformers of the tax, to pay, that the life 
of twenty-five years' purchase pays only half as much as he should do? 
Still more absurd would be the attempt to average trades. Many trades 
are worth twenty-five years' purchase. . . . Let us, however, state the 
case moderately, and say that some trades are worth twenty-five years' 
purchase; there are others not worth more than five, four, or three 
years' purchase, and how are you to average the interest of a trade 
worth three and another worth twenty-five years' purchase? I must 
enter my protest against this averaging of classes as a mode of what is 
called doing justice in the matter of the income tax." 



TAXES ON EXPENSE 183 

class to which he is assigned he is entitled to he sick only 
three days in a year. The only ground for including a 
number of objects in a class, is their common possession of 
certain attributes or qualities, and we can reason concern- 
ing a class only in so far as we reason concerning those 
qualities. Furthermore, the larger the class, the smaller is 
the number of qualities that it includes; denotation and 
connotation vary inversely. Man is a very general name ; 
the great number of individuals that it denotes severely 
limits its connotation, and the fact that a Chinaman and 
a Spaniard are both men enables us to draw comparatively 
few inferences concerning them. Laborer is also a very 
general name; it is applied to an enormous number of 
human beings who may have very little resemblance to one 
another, and in fact very few assertions concerning the 
laboring class have any pretence to accuracy. 

For what is the differentia of this class ? Is it the per- 
formance of manual labor ? And does manual labor mean 
muscular exertion ; and, if so, is it with or without intel- 
lectual activity? Is it manual labor to telegraph, but not 
to telephone, to operate a type-writer, but not to use a pen ? 
Is it manual labor to give lessons in gymnastics, but not in 
writing; to play on the piano, but not to sing? Is it 
manual labor to care for babes, but not to nurse bed-ridden 
adults ? Enter a modern machine shop, and you behold a 
number of men apparently doing nothing; really the 
machines are doing the work, and the men are watching to 
see that it is done properly. When hand brakes were in 
general use a great deal of muscular exertion was required 
to operate them ; have the brakemen ceased to be laborers 
because the air-brakes are operated by steam ? Are semp- 
stresses laborers, but saleswomen not? The occupation 



184 THE METHODS OF TAXATION 

of a bank clerk is properly called extremely laborious; is 
he properly called a laborer ? 

It may be said that it is not the exertion of the muscles 
that constitutes the differentia, but the receipt of com- 
pensation for services. Vast numbers of men exercise 
vigorously, but their exertion is not regarded as labor 
because it is not paid for by any one; if they exerted 
themselves for pay they would be laborers. But soldiers 
might according to this definition be classed as laborers, 
which is certainly paradoxical. And if every one who 
does another a service for pay is a laborer, lawyers and 
doctors must be called laborers, and this too is contrary to 
usage. Nor does it seem to be material that payment is 
sometimes made daily or weekly, and sometimes by the 
month, or even by the year. It is still common for laborers 
on the land to hire themselves by the year; and teachers 
may be paid by the hour. Many clerks are employed by 
the week or month, and many miners and workmen in 
mills by the year. Possibly it might be maintained that 
whoever received a compensation that was commonly called 
wages was a laborer, but not if his compensation was called 
by another name. But this appears to be a mere verbal 
distinction, for men doing similar work are said sometimes 
to receive salaries, and sometimes wages. Moreover, vast 
numbers of men work for themselves, and for others at the 
same time ; they are their own employers, and they in fact 
receive both wages and profits. They certainly perform 
labor, and the products of their labor are of service to the 
community; but they are not said to receive wages, and 
are not called laborers. 

The existence of this latter class proves that we cannot 
now, whatever may have been true in the past, make an 



TAXES ON EXPENSE 185 

economic class of laborers. Probably the nearest approach 
to a differentia would be comparative poverty; we might 
say that men who did work for others for a very small 
compensation were laborers. The value of this distinction, 
however, is due to the fact that it is a real distinction 
between two economic classes, the rich and the poor. It is 
no doubt true that unless they worked for others some 
persons would starve and that some would not. Yet a 
great many people who do work for others could still live 
comfortably, although more simply, if they did no work. 
They are rich, but they prefer to have a larger income than 
suffices to maintain life. And this is true of vast numbers 
of those who perform manual labor, whether light or heavy ; 
they could subsist on much less than they earn, perhaps on 
what they have saved from their earnings, and they often 
give up work when they find their strength declining. In 
this country, at least, it might almost be said that there is 
in fact no " irreducible minimum " ; there is no consider- 
able number of persons who could not live on smaller in- 
comes than they receive. They could also marry and rear 
families ; for, under the modern system of industry, wives 
may earn a good deal by working away from their homes, 
and the support of children, from birth to maturity, can 
be largely thrown on the public. There are free lying-in 
hospitals, free creches or day nurseries, free schools, with 
free transportation thereto, free medical attendance and 
prospectively free lunches, together with numberless 
" homes," and unbounded private alms. 

Even if we limit our reasoning to such persons as re- 
ceive a compensation for manual labor called wages, we 
cannot assume that they are comparatively poor. Skilled 
mechanics often earn more in a year than many lawyers 



186 THE METHODS OF TAXATION 

or doctors or clergymen. They commonly earn more than 
clerks and perhaps twice as much as teachers. A skilled 
laborer in the City of New York receives usually, perhaps, 
a larger compensation than many a professor in our col- 
leges, than not a few judges, and in some cases three times 
as much as most country ministers. Some of those em- 
ployed in iron works are said to earn ten and even fifteen 
dollars a day; which is ten or fifteen times what many 
common laborers receive. Even in the same kind of in- 
dustry, wages differ greatly in different parts of the coun- 
try. In the City of New York the workmen employed in 
the building trades obtain as much for an hour's work as 
men similarly employed in some parts of the country get 
for working a half, or even a whole day. Now if the pur- 
pose of assuming the existence of a laboring class is to 
assess the average income of its members, it seems clear that 
very great inequality of sacrifice on the part of individuals 
must result. Modern economists, we may add, are inclined 
to class many persons as laborers who would not have been 
formerly so described. 1 

As a matter of fact, no one has illustrated the inequali- 
ties in laborer's wages more strikingly than Adam Smith 

1 Sidgwick, for example, extends the meaning of "production" so 
as to include in it the labor of carriers and traders, no less than that of 
farmers and manufacturers. Pol. Ec, p. 98. And he also includes "in 
the notion of labor that earns wages all remunerated employment of 
time and energies; and therefore the exertions, intellectual and mus- 
cular, of the employer no less than those of the employed." Ibid., p. 320. 
He adds also that "there is hardly any branch of industry in which a 
laborer stronger, more industrious, more skilful, or more careful than 
his fellows is not likely in one way or another to obtain more than the 
average rate of remuneration." Such a laborer is only indirectly con- 
cerned in the average rate of wages in his own industry. He is even 
less concerned in the variations in an average found by dividing the 
aggregate of workers' remuneration among the aggregate of workers. 
Ibid., p. 328. 



TAXES ON EXPENSE 187 

himself. He enumerates five circumstances in the nature 
of employments which vary the wages of labor, a number 
to which later economists have made some additions, and 
he explains how the " policy of Europe " has occasioned 
other inequalities of much greater importance. It is un- 
necessary to do more than refer to so classical an analysis ; 
but it shows how vague the meaning of " the laboring class " 
has always been. As we have seen, when Smith deals with 
taxation, he divides workmen into the sober and industri- 
ous, and the dissolute and disorderly; and much of his 
reasoning applies to the " lowest rank " or " lowest order " 
of the people. These classifications are certainly impor- 
tant; but they have no essential relation to the classes of 
wage-receivers, or of laborers. The full significance of this 
point will appear if we examine what is involved in his 
view of the taxation of luxuries. 

The classification as a luxury of any object of desire not 
indispensable to existence depends solely, according to his 
statement, on the relation which the consumption of that 
object bears to decency, or the state of public opinion con- 
cerning its use. Whatever a man may dispense with with- 
out incurring discredit, is a luxury, no matter how uni- 
versal its use, or how wholesome it may be. Yet, even 
when he wrote, his reference to leather shoes showed that 
the standard of decency varied in different parts of the 
same country, and his illustration taken from the use of 
linen shows that such standards vary not only from place 
to place but also from time to time; for linen shirts are 
now worn only by some of the richer members of society. 
As he explained, potatoes are a cheaper food than oats, and 
oats than wheat; the common people of Ireland subsisted 
largely on potatoes, those of Scotland on oatmeal, and 



188 THE METHODS OF TAXATION 

those of England on wheaten bread. Now potatoes are " pe- 
culiarly suitable to the health of the human constitution " ; 
as much so as wheat, and more so than oats. " The chair- 
men, porters, and coal-heavers in London, and those unfor- 
tunate women who live by prostitution, the strongest men 
and the most beautiful women perhaps in the British do- 
minions, are said to be, the greater part of them, from the 
lowest rank of people in Ireland, who are generally fed 
with this root. ]No food can afford a more decisive proof of 
its nourishing quality." 

It is certainly not true now, and it was perhaps not true 
when Smith wrote, that the use of potatoes by an English 
family would be regarded as indecent. And it is unques- 
tionably true now, and was on his own showing true then, 
that the ordinary laborer consumed many things beyond 
what decency required. There exist very great differences 
in the quality of things comprehended under one name. 
We speak of meat, meaning usually the flesh of graminiv- 
erous animals, including swine. The number of varieties 
of meat, however, is much greater than that of the species 
of these animals. Every one that has any acquaintance 
with agriculture knows that wide differences in value exist 
between different individuals of the same species, and 
every one that carries on a household knows that the prices 
of different parts of the same individual are very divergent. 
All these differences vary in different parts of the same 
country, and are even wider in different countries. When 
we speak of the consumption of meat by laborers, therefore, 
we are using a very ambiguous expression. We may have 
in mind the cheaper parts of the cheaper grades of swine 
or oxen, while our hearers may understand the more ex- 
pensive parts of the corn-fed steers of the west, or perhaps 



TAXES ON EXPENSE 189 

the choicest poultry. The cost of what we have in mind 
may not be a quarter, or even a tenth, of what we are under- 
stood to mean ; and corresponding differences in consump- 
tion actually take place. There are, however, no corre- 
sponding differences in nutritive power, and it can scarcely 
be contended that decency forbids any one to use in his 
own house the cheaper kinds of food. Decency, in Adam 
Smith's sense, means what is required by public opinion ; 
and whatever may be true of private gossip, the contents 
of the ordinary larder do not fall within the cognizance of 
the public. 

Adam Smith's illustrations also show that he had in 
mind the clothing in which men appear in public. But the 
differences in the quality and the cost of clothing are much 
greater than in the case of food. Even in his day, there 
was a great difference between coarse and fine linen; and 
in modern times the qualities of cotton and woolen fabrics, 
and of their manufacture into clothing, are numberless. 
Decency does not forbid the use of many of the cheaper 
grades by " creditable day-laborers " ; women, indeed, of 
the poorer class are often thought more creditable when 
their attire is not expensive, than when it is noticeably so. 
Whatever may have been true in the past, it seems impos- 
sible to deny that in modern times a very large part of the 
expense of the mass of the people is for things that they are 
not required to use by decency; things of higher quality, 
for which cheaper things of the same kind, or cheaper sub- 
stitutes, could without injury to health be employed. If 
this conclusion is valid, we cannot accept Adam Smith's 
definition of a luxury as satisfactory. It is not the defini- 
tion that we should now give to the word; and there is 
reason to maintain that he did not always adhere to it. 



190 THE METHODS OF TAXATION 

In the first place, as we have already noticed, he called 
attention to the fact that the whole consumption of the 
inferior ranks of people is much greater, not only in quan- 
tity but also in value, than that of the middling and supe- 
rior ranks. Almost the whole capital of every country, he 
declared, is annually distributed as wages of productive 
labor. Much of rent and profit is distributed in the main- 
tenance of the lower rank, as wages of unproductive labor. 
The taxes upon expense, therefore, which fall chiefly upon 
that of the superior ranks of people, are likely to be much 
less productive than either those which fall indifferently 
on the expense of all ranks, or those which fall chiefly upon 
that of the inferior ranks. This conclusion he regarded 
as proved by the results of the excise. 

Accepting this conclusion, which indeed seems indisput- 
able, we see that the excise must fall on all, or nearly all, 
of the inferior rank of people ; for if it were paid by but a 
few of them it would be unproductive, instead of being the 
most productive of all taxes. It is true that Adam Smith 
makes some attempt to show that this tax may be paid only 
by the immoral members of this rank. He divides this 
class into two classes for that purpose ; the sober and indus- 
trious poor, and the dissolute and disorderly. It is implied 
that only the latter class may submit to this tax ; but unless 
the latter class is a very large one, this implication cannot 
be correct. Now neither Smith, nor perhaps any one else, 
would contend that laborers are, as a rule, dissolute and 
disorderly. Persons of that description constitute but a 
small part of the whole number. Hence their payments to 
the excise would amount to comparatively little; and the 
sober and industrious must pay by far the greater part of 
this tax. "Whether the objects subjected to this tax be 



TAXES ON EXPENSE 191 

properly called luxuries or not, they are objects the enjoy- 
ment of which the common people will not deny themselves, 
even if they are taxed on that indulgence. 

It is to be noted, too, that Adam Smith expressly de- 
clared that he did not mean to throw the smallest degree 
of reproach upon the temperate use of them. " The trade 
with the alehouse is not necessarily a losing trade. In 
its own nature it is just as advantageous as any other, 
though perhaps somewhat more liable to be abused." 
The workman may no doubt buy too much of the retailer 
of fermented liquors, or of the brewer, " as he may of 
any other dealers in his neighborhood, of the butcher, if 
he is a glutton, or of the draper, if he affects to be a beau 
among his companions. It is advantageous to the great 
body of workmen, notwithstanding, that all these trades 
should be free, though this freedom may be abused in all 
of them, and is more likely to be so, perhaps, in some 
than in others. Though individuals, besides, may some- 
times ruin their fortunes by an excessive consumption of 
fermented liquors, there seems to be no risk that a nation 
should do so. Though in every country there are many 
people who spend upon such liquors more than they can 
afford, there are always many more who spend less." 1 

1 "It deserves to be remarked, too, that if we consult experience, 
the cheapness of wine seems to be a cause, not of drunkenness, but of 
sobriety. The inhabitants of the wine countries are in general the 
soberest people in Europe ; witness the Spaniards, the Italians, and the 
inhabitants of the southern provinces of France. People are seldom 
guilty of excess in what is their daily fare. Nobody affects the char- 
acter of liberality and good fellowship by being profuse of a liquor 
which is as cheap as small beer. On the contrary, in the countries 
which, either from excessive heat or cold, produce no grapes, and 
where wine consequently is dear and a rarity, drunkenness is a common 
vice, as among the northern nations, and all those who live between 
the tropics, the negroes, for example, on the coast of Guinea. When a 



192 THE METHODS OF TAXATION 

Since the number of things entering into the consump- 
tion of the common people is now much greater than 
formerly, and since the number of species of every one of 
these things is also considerable, while there are many 
grades of quality among these species, we seem obliged 
to abandon Adam Smith's definition of a luxury as in- 
adequate. We may, perhaps, define it as something the 
consumption of which is not indispensable to healthy ex- 
istence, but by doing so we unavoidably include many 
things commonly spoken of as necessaries. We are driven 
therefore to attempt to classify luxuries, an illustration 
of which appears in the common parlance by which some 
things are called harmless luxuries and some hurtful. A 
further distinction is made between things which men 
often consume to excess; that is, with injurious results 
to themselves and to those dependent on or connected 
with them. Now, as has been explained, a tax on anything 
not consumed in great quantities is of small consequence; 
the revenue so arising would be insignificant. Hence the 
thing taxed must be consumed by all, or nearly all the 
common people. But it seems no more just to tax the 
harmless luxuries of the poor than to tax their neces- 



French regiment comes from some of the northern provinces of France, 
where wine is somewhat dear, to be quartered in the southern, where 
it is very cheap, the soldiers, I have frequently heard it observed, are 
at first debauched by the cheapness and novelty of good wine; but 
after a few months' residence the greater part of them become as sober 
as the rest of the inhabitants. Were the duties upon foreign wines, and 
the excises upon malt, beer, and ale, to be taken away all at once, it 
might in the same manner, occasion in Great Britain a pretty general and 
temporary drunkenness among the middling and inferior ranks of peo- 
ple, which would probably be soon followed by a permanent and al- 
most universal sobriety. At present drunkenness is by no means the 
vice of people of fashion, or of those who can easily afford the most ex- 
pensive liquors." Wealth of Nations, Book IV, Chap. Ill, Part II. 



TAXES ON EXPENSE 193 

saries; even if it were practicable to distinguish such 
things by statute, the attempt, if understood by the public, 
would be condemned. Hence the tax must be applied to 
harmful luxuries ; to things universally used but which are 
harmful if used at all, or to things in which immoderate 
indulgence is very general, whether they be intrinsically 
harmful or not. The justice of taxing A for consuming 
a thing which is not harmful to him, because B consumes 
that thing intemperately, may be considered hereafter. 

'Now there is undoubtedly a general belief in this coun- 
try that the drinking of beverages containing alcohol is 
not essential to healthy existence, although the practice 
is very extensive among the common people; and there 
is a widespread conviction that the practice is positively 
hurtful. Whether the moderate use of such drinks is 
injurious or not, it is notorious that many persons are 
immoderate in their use, and that such excess is seriously 
detrimental, not only to the drunkard, but also to his 
family and to the community. Similar beliefs prevail 
to a less extent concerning the use of tobacco. So power- 
ful are these convictions that many persons who habitually 
consume alcoholic drinks are influenced by them, and re- 
gard their own practices as falling somewhat short of the 
highest requirements of morality. 

~No doubt many persons are not conscious of any in- 
clination to indulge excessively in things of this kind, 
and either regard them as harmless luxuries, or as they 
regard the ordinary necessaries of life. They are so re- 
garded in most European countries, and have always been 
so. Machiavelli describes a campaign undertaken by the 
Florentines, which they were obliged to abandon because 

the region occupied could not furnish wine for the soldiers : 

is 



194 THE METHODS OF TAXATION 

to subsist without wine was evidently then thought impos- 
sible, and in many places it would be thought so to-day. 
The rulers of France do not venture to tax to any great 
extent the wine which is universally drunk in the greater 
part of that country, nor perhaps would a heavy tax on 
beer be submitted to with patience in Germany. Sir 
Kobert Walpole proposed some very desirable reforms in 
the English excise, but he was compelled to abandon them 
for fear of a rebellion. The ignorant apprehension of the 
common people that their drink might be more heavily 
taxed, stirred up by certain parties interested against the 
reforms, proved an insuperable obstacle. 1 The tax on 
distilleries has always been peculiarly odious in Ireland, 
and has been steadily resisted in some parts of our own 
country. The mass of our common people, however, never 
having known a time when tobacco and alcoholic liquors 
were untaxed, and being wholly incapable of estimating 
how much their expenses are increased by such taxation, 
cannot be said to have any convictions on the subject; 
and public opinion, whether rationally or not, appears 
to be overwhelmingly in favor of taxes on strong drink, 
if not on tobacco. 

Although we are not directly concerned with the ques- 
tion how far the taxation of things, the excessive con- 
sumption of which is regarded as pernicious, tends to 
reduce that excess, it may be observed that no satisfactory 

1 The reform proposed by Walpole in 1733 was really the establish- 
ment of bonded warehouses. But mobs attacked members, petitions 
were sent in from the City, and there were signs of general rebellion. 
Parliament declared that it would not be influenced by mob rule, but 
Walpole said that in the temper of the country the measure could not be 
carried without armed force, and that there would be an end to the 
liberties of England if supplies were to be carried by the sword. The 
system was not established till 1803. 



TAXES ON EXPENSE 195 

proof has been offered that there is less drunkenness in 
communities where alcoholic drink is heavily taxed than 
elsewhere. In England, where the excise is heaviest, there 
is much drunkenness, and the consumption of strong liquors 
is perhaps greater than in any other country. We have 
already referred to Adam Smith's observation on the habits 
of soldiers transferred to the wine-growing provinces of 
France ; and it is well to remember that the early settlers 
of New England were accustomed to drink ale before 
they emigrated, and regarded water as an unwholesome 
beverage. To be compelled to drink it here was one of 
their greatest hardships, and innkeepers were required by 
law to furnish ale to their guests. But they soon learned 
to produce cider in prodigious quantities, and at a later 
time distilled a great deal of rum. Many aged persons, 
however, whose recollection goes back to the days when 
there were no taxes on drink, declare that, making al- 
lowance for the general improvement of morals, drunken- 
ness was no greater evil then than now. In those states 
where drinking is prohibited by law, so far as prohibit- 
ing the production, selling, or giving away of drink can 
achieve that end, there appears to be even more drunk- 
enness than elsewhere. Paradoxically enough, more 
drunkards are found among the very poor than in the 
wealthier classes. It might be supposed that the wealthy 
would not give up their accustomed drinks because 
they were heavily taxed, and that the poor would do 
so. But while there is much testimony to the effect 
that the well-to-do are more temperate than formerly, 
we find little evidence that this is true of the poorest 
class. 

It seems probable that the very poor, being often very 



196 THE METHODS OF TAXATION 

miserable, have an intense desire for whatever gives them 
relief from their sufferings, even if it be but temporary, 
and if they cannot otherwise obtain it, will deny them- 
selves, to a considerable extent, food, clothing, and other 
things which appear to those more comfortably situated 
indispensable to existence. They seek " some short cut 
to happiness, some moments of emancipating excitement." 
Strong drink gives them warmth and exhilaration. It 
brings them brief oblivion of their present misery and 
of their hopeless future. Similar effects seem to be pro- 
duced by other stimulants, such as opium and perhaps 
tea. The almost universal consumption of tobacco, even 
by those who can obtain it only by stinting themselves in 
the use of what are called necessaries, indicates that it 
serves an important purpose, the precise nature of which 
appears to be imperfectly understood by physiologists. It 
is certainly paradoxical to describe as luxuries such things 
as tobacco, which are generally, in the estimation of those 
who use them, more indispensable than most articles of 
food ; which men, it is true, can forego, as they can forego 
meat and fish and fruit and sugar, but which they will 
forego only after they have reduced their consumption 
of these commodities. 

There is some ground for believing that when the cost 
of these luxuries of the poor, if they are to be so termed, 
is greatly increased, their quality becomes much impaired. 
The quality of the distilled liquors consumed in states 
where their sale is prohibited, is notoriously inferior. The 
common people in those states often drink alcohol, and 
other imperfectly refined spirits, the physiological effects 
of which are very injurious. The prohibition of the traffic 
amounts to a high tax on liquor; for those who engage 



TAXES ON EXPENSE 197 

in so dangerous an occupation must be compensated with 
a high rate of profit. Hence fermented liquors, having 
little alcoholic strength in proportion to their bulk, and 
being correspondingly difficult to conceal, are replaced 
by spirits of the most concentrated form. The very high 
excise of the national government causes much illicit dis- 
tillation, the product of which must be at once disposed 
of, although the poisonous elements naturally require sev- 
eral years for their elimination. The effects of these 
inferior liquors are certainly more pernicious than those 
of properly distilled spirits, or of sound wines and beers, 
and they are believed to cause drunkenness of a peculiarly 
violent character. Complaint is also heard that those 
who are prevented from obtaining alcoholic beverages fre- 
quently resort to patent medicines, which contain much 
alcohol, and to opium and other drugs. 

It may be added here that the Internal Revenue returns 
furnish strong evidence that neither high taxation nor 
depressed industry has much effect in reducing the con- 
sumption of these luxuries; indeed, fermented drinks 
are now consumed to an enormously greater extent than 
they were before they were taxed at all. In the year 1907 
the revenue from distilled spirits was over $156,000,000, 
and that from fermented liquors was nearly $60,000,000. 
The decline in revenue during the years succeeding the 
panic of 1893, when revenue from other sources fell off 
materially, was comparatively moderate, in spite of in- 
creased taxation. The claim, therefore, that these beverages 
are proper subjects of special taxation because those who use 
them can abstain if they choose, does not appear to deserve 
serious consideration. We are not concerned with what 
men can do if they choose, but with what they in actual 



198 THE METHODS OF TAXATION 

life choose to do. Theologians have elaborately explained 
that men have the power to be sinless; they can> it is 
maintained, always choose right. In practice, however, 
they also explain that men do choose wrong; and cer- 
tainly, in legislation, we must deal with men according 
to their conduct as exhibited in experience, and not as 
it might be if they were governed by other motives than 
those which are actually potent. No one had more thor- 
ough information concerning these subjects than the late 
David A. Wells ; and his conclusion was that " if moral 
influences have ever materialy affected the general con- 
sumption of distilled spirits or fermented liquors in the 
United States, the tabulated tax experiences of its Gov- 
ernment, which constitute the only reliable basis for form- 
ing an opinion, do not afford any indication of it." * 

On these grounds we must regard it as doubtful whether 
the high taxation of things, the excessive use of which is 
commonly called immoral, has much effect in preventing 
such excess, even if it is not positively demoralizing. 
Should this conclusion be established, the problems aris- 
ing from the taxation of articles of consumption would 
be simplified. We need engage in no controversy concern- 
ing what is a necessary and what is a luxury, or whether 
it is just to compel those who consume certain things in 
moderation to pay a tax on them because it is thought 

1 The president of the Distilling Company of America, a concern 
which produces a large portion of the spirits consumed in this country, 
reports that when a state legislature enacts a prohibitory law the sales 
of his company's products in that state usually increase. During the 
year 1897 the tax paid on distilled spirits showed a consumption of 
some 64,000,000 gallons, or nine-tenths of a gallon per head of popu- 
lation. For fermented liquors the corresponding figures were 
1,101,500,000, and 15.4. In 1907 the number of gallons of distilled 
spirits paying tax was 134,000,000, or 1.58 gallons per head; of fer- 
mented liquors, 1,873,475,000, or 22 gallons per head. 



TAXES ON EXPENSE 199 

desirable to tax those who use them to excess. So long 
as such controversies engage the attention of the legis- 
lature, it seems hopeless to attempt to treat taxation as 
a science, or to attain any approximation to the ideal 
of equality of burdens. As has been pointed out, public 
opinion is overwhelmingly in favor of taxing certain 
things called, whether properly or improperly, luxuries, 
and we must assume that such taxes will long be retained. 
They should be treated, however, on the same principles 
as taxes on other things commonly consumed; and our 
experience shows that they tend to be governed by these 
principles even when others are involved. The important 
points are that the revenue of the common people is some- 
what more than sufficient for their support, that a tax 
on anything generally consumed by them may transfer a 
part of this revenue to the use of the government, and 
that the more extensive the use, the more productive will 
the tax generally be. Salt is perhaps more universally 
consumed than any other commodity, and the English 
government derives from a tax upon it a large part of 
the revenue which it requires to maintain its Indian 
Empire; although the inhabitants of that Empire are 
perhaps even less able to endure taxation than the com- 
mon people of England were when Adam Smith wrote. 

There is reason to suppose that the effects of the tax 
imposed by the United States government on distilled 
liquors are not fully comprehended by the public. To- 
bacco and tea, wine and beer, are used almost exclusively 
like food or as drink; they are introduced directly into 
the alimentary system. Distilled spirits, however, are 
extremely useful for innumerable purposes. They are 
indispensable in compounding medicines, which must cer- 



200 THE METHODS OF TAXATION 

tainly be classed as necessaries rather than luxuries, since 
without them life would often be lost; but they are also 
indispensable in many of the arts. In fact there are 
few substances having so many and such important uses 
in manufactures as alcohol. It is used as a fuel for 
motors, and for heating and cooking, as well as to give 
light. It is necessary in making smokeless powder, in 
making dyes, celluloid, lacquer, varnishes, and number- 
less other articles. By its aid cotton can be so treated 
as to be a cheap and acceptable substitute for silk ; and it 
is indispensable in the processes of photography. It would 
seem to be dictated by common sense, if not by the most 
elementary political wisdom, that the government should 
not deliberately repress all these industries, even if it did 
nothing to foster them. For more than forty years, how- 
ever, our government has levied a tax at various rates on 
the production of this substance, which has during part 
of this time amounted to nine or ten hundred per cent — 
sometimes even fourteen or fifteen hundred per cent — 
on its cost. It can ordinarily be produced and sold for 
perhaps twenty-five or thirty cents, while the tax has of 
late years amounted to over two dollars a gallon. In the 
year 1907, apparently without any intelligent purpose of 
relieving industry, but with a confused notion that it 
might thus decrease the profits of the shareholders in the 
Standard Oil Company, Congress adopted the policy of 
other countries, and remitted the tax on the distillation 
of alcohol, provided it was rendered non-potable by adul- 
teration with some poisonous substance. 1 

Although there are, according to men competent to form 

1 Nearly 6,000,000 gallons of methylated spirits are consumed yearly 
in England. 



TAXES ON EXPENSE 201 

an opinion on such matters, good fiscal reasons for taxing 
the production of spirits rather than the sale, our gov- 
ernments have taxed both. The general government com- 
pels the payment of license fees by all dealers in alcoholic 
liquors, and the states and municipalities have commonly 
adopted a similar policy, the result being that three or 
four taxes are levied on the same thing. The charge for 
these latter licenses is often very high; it is a thousand 
dollars a year in some cities, and more than this in others. 
They are also very productive of revenue, and the re- 
quirements of the law, at least so far as the general gov- 
ernment is concerned, are enforced with some strictness. 
It is evident, therefore, that no fiscal reasons prevent the 
government from obtaining a large revenue by taxing 
potable alcoholic liquors where they are sold, and leaving 
the production of alcohol free. No doubt much untaxed 
liquor would then be drunk, as much is drunk now. But 
as it is now entirely possible for any one to obtain liquor 
elsewhere than at the licensed drinking places, and thus 
avoid the payment of the tax on drink sold there, and 
as immense numbers of people do not choose to avoid 
taxation in this manner, it is clear that the fiscal advan- 
tages of taxing the production of alcohol have been ex- 
aggerated. There is certainly no pretence to justice in 
taxing every man who paints his house or varnishes his 
wagon, because other men are prone to indulge in drink; 
especially since the feasibility of taxing the latter class 
and exempting the former is demonstrable. 

Although the analysis of the effects of taxing the use 
of alcohol should properly take place when the diffusion 
of taxes is examined, it may be here remarked that the 
excise on distilleries in this country has always been 



202 THE METHODS OF TAXATION 

fruitful of fraud and corruption. At times whiskey has 
actually been sold in the market for less than the tax on 
it, and while the revenue from this source is better col- 
lected than formerly, there is notoriously much illicit 
distillation. Hundreds of lives have been sacrificed in 
the attempt to collect this tax in the mountainous parts 
of the sounthern states, and the Commissioner of Internal 
Revenue has recently declared that in Virginia many of 
the distillers have been making two or three gallons of 
whiskey for every gallon on which they pay the tax, and 
that the same practice goes on to some extent in all the 
states where whiskey is made. Under the law, the gauger 
employed by the government is required to watch every 
drop of liquor as it falls from the still, to barrel it, and 
place the barrels in a storehouse to which he alone has 
access. But the law allows a margin of twenty per cent 
to the distiller; that is, the grain that he uses being 
weighed, the spirits gauged must be eighty per cent of the 
maximum quantity that can be distilled from grain of 
that kind. It is the custom, the commissioner declares, 
for the gauger to withdraw so soon as he has gauged the 
required eighty per cent, while the distiller extracts as 
much more as he can for his own account. Frauds of this 
kind are inseparable from the practice of manufacturing 
under the supervision of government employees, and there 
are many other devices by which unscrupulous manufac- 
turers can undersell such competitors as attempt to comply 
strictly with the law. It is impossible to estimate the 
number of illicit stills in existence, but hundreds of them 
are detected every year, and it is supposed by some of the 
revenue officers that there may be thousands of them in 
operation even in the city of !New York. Many reputable 



TAXES ON EXPENSE 203 

persons are driven out of a business where the policy of 
the government exposes them to competition of this char- 
acter, a violation of recognized principles of justice that 
has been already characterized. 1 

Tested by the principle that justice in taxation implies 
some equality of sacrifice on the part of individuals, the 
English system of taxing the expense of the lower order 
of people, whatever its theoretical perfection, must be 
condemned. No doubt the poorest of the poor, under this 
system, contribute to the support of the government; but 
they contribute far more than in proportion to their reve- 
nue. The tax is obviously much lighter for a workman 
with no family than for one having a wife and children 
to support, and it becomes progressively lighter as the 
remuneration of the workman increases. The constitu- 
ents of the nutrition of the poor are substantially identical 
with those of the food of the rich. Their blood is physio- 
logically similar to that of their fellow creatures, and 
they require the same elements in the substances from 
which it is made. There is, however, an infinite variety 
in the qualities of these substances, reflected in differences 
in price; while the difficulties in the way of imposing 
lower duties on the inferior qualities have been found 
to be insuperable. 

Professor Fawcett long ago observed that the duty paid 

1 The extent to which illicit distillation prevails under the very high 
duties imposed in the United Kingdom has always been considerable, 
and in Ireland it was formerly so great as to compel the lowering of the 
tax. The rate prior to 1842 was about 2s. 8d. a gallon, and the produc- 
tion taxed about 11,000,000 or 12,000,000 gallons. Peel added a shilling 
to the tax and the production fell to 5,000,000 gallons. After this tax 
was taken off the quantity gradually rose to 8,200.000 in 1853. It was 
many years before an increased tax was imposed with better results; 
but there were 1,174 seizures of illicit stills, etc., in 1904-05. 



204 THE METHODS OF TAXATION 

on the tea consumed by the poor was three times as great, 
in proportion to the value of the tea, as the duty paid on 
that of superior quality, but that no method of applying 
an ad valorem duty had been found practicable. Nor has 
any such method been found very practicable in the case 
of strong drink ; 1 the motives to supply the demands of 
the very poor at the lowest possible price, as we have 
observed, cause all manner of adulteration to be employed, 
and force the products of distillation and fermentation 
into use before the time necessary for the elimination of 
the most injurious elements has elapsed. It is perhaps 
natural for one with no craving for such stimulants as 
these drinks and tea and tobacco, or with the means to 
procure the finer qualities of them, to stigmatize them 
as luxuries which the poor, or at least the sober and in- 
dustrious poor, can deny themselves. But as a matter of 
fact it admits of no dispute that the very poor do not 
consider that they can deny themselves these indulgences, 
and that the very heavy taxes laid on them not only 
enormously increase their cost, but also materially impair 
their quality. 

It may appear somewhat more practicable to lay taxes 
on the luxurious consumption of the rich. To keep a 
footman is hardly to be regarded as essential to healthy 
existence, and the same is true of the display of coats-of- 

1 On this subject, Gladstone, speaking in 1853, remarked: "An- 
other plan would be to fix a duty of several rates on wine of different 
values, somewhat resembling the duty on different qualities of sugar. 
But if that is attended with difficulty in the case of sugar, with how 
much greater difficulty would it not be attended in that of wine ? . . . 
The Revenue Department would have the greatest difficulty in carrying 
out such a system." Sir W. Harcourt said in 1894: "A gallon repre- 
sents six reputed quart bottles of proof spirit, but, in point of fact, at 
the strength below proof at which spirits are usually sold, it would 
represent eight bottles." 



TAXES ON EXPENSE 205 

arms. So much cannot be said of maintaining a carriage. 
A physician might be unable to practice without one, and 
they may be indispensable for the comfort and even for 
the existence of many feeble persons. Public carriages, 
indeed, can hardly be classed as luxuries, either of the 
rich or of the poor. The English government taxes all 
three forms of expense by means of licenses. The number 
of licenses to keep male servants taken out is about 
220,000, producing £163,000 ; those for armorial bearings 
number about 57,000, and produce nearly £75,000. For 
carriages the number is about 480,000, producing some 
£470,000, and for hacks 133,000, bringing in nearly 
£100,000. Licenses to use guns and to kill game may 
be regarded as taxes on the luxuries of the rich; they are 
notoriously disregarded, but they bring in nearly £300,000. 
The tax on hair powder survived a long time, but finally 
became too absurd and too insignificant to be retained. 
More than half a century ago John Bright said that this 
tax and that on armorial bearings — which applies even 
to emblems stamped on letter paper — made the system 
ridiculous and ought to be abolished. Such taxes cause 
a vast amount of vexation and loss of time, and are very 
troublesome to collect. The progressive death-duties, with 
the high income tax, constitute so heavy a charge on the 
expense of the rich as should entitle them to relief from 
petty exactions. 

In our own country, taxes on such things as are sup- 
posed to be consumed exclusively by the rich have been 
found to produce comparatively little revenue. The vari- 
ous manufactures of silk, and such articles as kid gloves, 
seem to be luxuries of the rich, but in fact the great bulk 
of their consumption is by the middling class of people. 



206 THE METHODS OF TAXATION 

The same is true of a great deal of jewelry. The common 
people of many countries are accustomed to preserve their 
savings in the form of gold and silver ornaments, and 
many persons in moderate circumstances have quite large 
investments in precious stones. Gold and silver watches 
may be regarded as luxuries, but they are by no means 
purchased by the rich alone. They are very generally 
taxable, as is jewelry, but the revenue from this source is 
insignificant. The value of all the diamonds in human 
possession is very great, and it might seem that they are 
owned exclusively by the rich. But although they are 
taxable, like other personal property, very little revenue 
is derived from them. Things of great value, but of small 
bulk, it has been found, cannot be reached by the assessor. 
They can so easily be concealed and removed, and their 
discovery requires such vexatious inquisition, that no at- 
tempt to tax them seems to have been attended with much 
success. Taxes of this kind may be paid if they are light ; 
but in that case the revenue derived from them is com- 
paratively small. Some exception may be made in the 
case of Champagne wine; it is occasionally prescribed 
for invalids, but its chief use is unquestionably as an 
ostentatious luxury, and it would be impossible to name a 
substance of which the enhanced price caused by taxa- 
tion involves less sacrifice on the part of those who pay 
it. Yet even in this case, as there are many grades of 
champagne, the tax is heavier on those that are cheaper 
owing to the difficulty of assessing ad valorem duties; 
and the same is true of fine wines in general. 

The system by which the government of the United 
States procures its revenue, however, is constructed with- 
out the slightest reference to either the proportionate or 



TAXES ON EXPENSE 207 

progressive method of taxation, or indeed to any principle 
of justice whatever. The whole revenue of the govern- 
ment is collected without requiring a single one of the 
eighty millions of its subjects to disclose the amount of 
his income, and without any pretence of graduating taxa- 
tion according to expense. Hence it is altogether a matter 
of chance whether the national system lessens or aggra- 
vates the inequalities caused by the systems of the states ; 
nor do the numerous specific taxes of the states appear 
to he much more certain in their incidence. The authors 
of these systems have seldom claimed to have had the 
equalization of the burdens of individual citizens in view, 
nor to have even conceived it to be a desirable end; and 
the discussions of these problems, which have exercised 
the talents of the most enlightened English statesmen and 
illuminated the debates in Parliament with the generous 
utterances of philanthropic wisdom, have found little place 
in the records of our legislatures. 

In explanation of this apparent indifference, it may be 
said that our rulers have wisely refrained from attempt- 
ing what they knew they were incapable of achieving ; but 
the principal reason is obviously to be found in the preva- 
lence of the protective theory of taxation. It is the aim 
of this theory to give the producers of certain goods an 
advantage in selling them, by taxing like goods produced 
by foreigners when imported into this country. When 
this is the aim of legislation, it is inevitable that number- 
less clashing interests must be somehow harmonized be- 
fore any measure can be adopted, a process which takes 
place without any occasion to appeal to any controlling 
or unifying principle of economical or ethical science. It 
is of course impossible to adopt the practice of the Eng- 



208 THE METHODS OF TAXATION 

lish government in imposing taxes, so far as may be, only 
on things fitted for final and immediate consumption ; the 
theory on which the practice is framed being that a tax 
paid on what are called raw materials requires the use 
of a part of a manufacturer's capital, and is regarded by 
him as an element in the cost of production. On this part 
of his capital he expects to obtain the same profit as on 
the rest, and the price is correspondingly increased to 
every subsequent purchaser. But where the policy of 
protection is adopted, the producers of raw materials natu- 
rally decline to tolerate such measures. The woolgrowers 
must be protected by a tax on unscoured wool or they 
will overthrow the whole tariff; there must then be a 
higher tax on scoured wool to protect the wool cleaner, 
a still higher tax on yarns to protect the spinner, another 
on cloth for the weaver, and a final one for the benefit 
of the maker of clothing. Under such conditions no at- 
tempt to adjust taxation with reference to the burden 
imposed on the poor can possibly be successful. 

It may be added that in one of the few cases where our 
government has imposed a customs duty for the purposes 
of revenue only, as when a tax on tea was levied by the 
act of 1898, the duty was intentionally so graduated as 
to fall with the greatest severity on the kinds of tea con- 
sumed by the very poor. The sacrifices of these persons 
were deliberately made greater than those of the well- 
to-do. The tax on imported sugar, as has been observed, 
also falls heavier on the poor than on the rich. The 
consumption of this substance does not increase very 
greatly when the income of the consumer increases, and 
certainly not in proportion to that increase. Very rich 
men will employ many servants, and in their households 



TAXES ON EXPENSE 209 

there will be much extravagance in the use of sugar, as 
in the use of other things; but the cost of sugar, and 
therefore that part of the cost which is due to the tax 
on it, will constitute a much smaller part of their ex- 
penditure, or of their income, than in case of the poor. 
Whether we attach any importance to the doctrine of 
economic classes or not, it is at least true that the taxes 
imposed by our national government appear to fall on the 
expense of the common people to a much greater degree 
than on that of the rich. 

Taxes on expense fall into the class called indirect ; and 
indirect taxes have always been regarded with high favor 
by governments. The reason for this is frankly avowed; 
it is because under this system subjects are not aware how 
heavily they are taxed. The distinction made in the Con- 
stitution of the United States between direct and indirect 
taxes has given rise to much legal casuistry, and writers on 
economics have not all agreed in their definitions of these 
terms. For the purpose of this inquiry, however, it is only 
necessary to observe that every tax, whether assessed on per- 
sons or property, is paid by some person to the tax-gatherer. 
If it actually reduces the revenue of that person and no 
other, it is properly called a direct tax. If it reduces the 
revenue of persons who do not pay it to the tax-gatherer, 
it is an indirect tax. This reduction is invariably effected 
through the payment of an enhanced price for things 
bought, which enhanced price reimburses the person who 
paid the tax in the first place. If the purchaser resells the 
thing, he may in turn reimburse himself; but there must 
always be a final purchaser, who does not resell the thing, 
but consumes it. As the extent to which the price of the 
thing has been enhanced in this process must always be a 

14 



210 THE METHODS OF TAXATION 

matter of conjecture, and as the great mass of the people 
are ignorant that it has been advanced at all, the tempta- 
tion to rulers to resort to indirect taxation is of course very 
great. 

We shall return to this subject when the diffusion of 
taxes is taken up, and it is considered here only because 
that feature in indirect taxation which recommends it to 
rulers is totally repugnant to accepted principles of justice. 
To deceive subjects concerning the extent of their burdens 
may perhaps be just from the point of view of a despot or 
an oligarchy; but there can be no pretence whatever that 
it is just for rulers chosen by the people to deceive their 
constituents. Indirect taxes, therefore, can be defended in 
a republic only on the ground of necessity. They may be 
believed to be indispensable ; they can never be maintained 
to be just. Pitt's celebrated denunciation of them was 
none too severe. 

No particular reference has hitherto been made to what 
is on many accounts the most important of all taxes on 
the indicia of income, that on dwelling-houses, although 
it is true that under the general property tax houses are 
assessed; and in England, in addition to the rates, there 
is an inhabited house duty. Taxes of this kind, however, 
are so peculiar in their nature, and involve especially so 
much reference to the law of diffusion, as to make it 
desirable to consider them separately, and they will ac- 
cordingly be reserved for treatment by themselves. 



CHAPTER VII 

TAXES ON TRANSFERS OF PROPERTY AT DEATH 

The taxes imposed on property, the title to which, or the 
possession or enjoyment of which, is transferred to others 
at the death of the owner, are known by several names. As 
property may be transferred in accordance with the will 
of a testator, a tax then imposed is properly enough de- 
scribed as a legacy tax or duty. When it is transferred 
from an intestate according to the laws denning the heirs 
and next of kin of a decedent, the tax may be called an 
inheritance or succession tax or duty. As the estates of 
decedents are usually administered under the jurisdiction 
of what may be generically described as Probate Courts, 
the taxes imposed may be called probate taxes or duties. 
All these taxes or duties are sometimes denominated trans- 
fer taxes ; but loosely, for many other transfers are taxable. 
As the termination of the life of the owner is the essential 
fact, a tax then imposed is most accurately named a death- 
duty, or death-tax; and this name is also preferable be- 
cause of its brevity. The name " duty " is more commonly 
employed in England ; but in the United States this word 
is usually understood to mean a tax on imported goods, and 
it seems better to confine it to that use. 

It has been perhaps sufficiently established that neither 
the proportionate nor the progressive method can be ap- 
plied unless the tax-gatherer can ascertain the quantity of 
wealth or income belonging to or enjoyed by every person. 
Experience seems to prove conclusively that such knowledge 



212 THE METHODS OF TAXATION 

cannot in practice be obtained, and that the attempt to 
obtain it inevitably results in the gross violation of ad- 
mitted principles of justice. The conclusion is strength- 
ened by the obvious fact that immense numbers of married 
women and children never come within the purview of the 
tax-gatherer at all; taxes on the goods that they consume 
not conforming to either of the methods under examination. 
Yet the very abandoning the attempt to tax proportionately 
this great number of persons, seems to apply in a way the 
progressive method. For it may be presumed that infants, 
and to a considerable extent married women, possess com- 
paratively little wealth, and whatever exemption they en- 
joy would appear to be in harmony with that principle of 
justice on which the progressive method is based. Nor does 
it seem unreasonable to suppose that nearly all persons who 
do not own the houses in which they dwell, and who support 
themselves by laboring for wages, are possessed of but a 
moderate amount of property. If then we can exempt this 
large class from taxation, and cause it to fall upon those 
who have great possessions, we have to a certain degree 
applied the progressive method. Graduated taxation of 
this kind is often called degressive, as being intended to 
lighten the burden of those relatively poor. 

The problem, it is true, cannot be said to be completely 
solved by ignoring its most troublesome elements. Even 
if we may assume it to be practicable to separate the poor 
from the rich, when we attempt to impose taxes on the 
latter the difficulty encountered in applying the general 
property tax reappears. All attempts to levy this tax, 
and all attempts to levy an income tax, as they require the 
discovery or disclosure of the wealth of every individual, 
are irreconcilable with our admitted standards of justice. 



TRANSFERS OF PROPERTY AT DEATH 213 

As between the two great classes of the rich and the poor, 
we may, after a fashion, apply the progressive principle; 
but as between the individuals constituting the class of the 
rich, this seems impossible. 

It is therefore on the principle of recognizing the classes 
of rich men and poor men that death taxes are declared 
just by the advocates of the progressive method. As no 
man can carry his possessions with him out of this world, 
the title to his wealth must somehow be transferred at his 
death to some living person; and in our country this is 
usually, and when estates are large, perhaps almost always, 
accomplished through the Probate Courts. Such proceed- 
ings necessarily imply the taking of an inventory and the 
making of an appraisal of the property of the decedent, 
and in this way the method of inspection can be very effec- 
tively employed. As we have seen, the assessment of prop- 
erty during the life of the owner is very slight evidence of 
its value ; but its appraisal after his death is good evidence, 
perhaps as good as can possibly be obtained. The tempta- 
tion to conceal wealth is much less, the difficulty of con- 
cealment much greater ; and in the case of many of the evi- 
dences of indebtedness known in general as securities — 
the form of property that is most commonly concealed while 
the owner lives — title cannot be transferred without the 
authority of the court and the attendant publicity. We 
may conclude, therefore, that the value of all property 
administered through the court may be quite accurately 
known, and it would seem to follow that the progressive 
method could be successfully applied. 

But before this conclusion is accepted we need to ascer- 
tain more precisely the effect of death taxes, and we shall 
be aided in this inquiry by examining the arguments em- 



214 THE METHODS OF TAXATION 

ployed in discussing the subject. Some writers have as- 
serted that such taxes are in the nature of a charge for the 
services rendered by the government in securing the trans- 
fer of the wealth of the dead to such persons as are entitled 
to it. No doubt moderate probate costs could be justified 
on this ground, but their amount would be too small to be 
of importance, and their effect in redressing inequality in 
the distribution of wealth inappreciable. Furthermore, 
we find that, in all laws imposing such taxes, transfers of 
property effected by deeds of trust, which may be carried 
out without the aid of the Probate Court, are subjected to 
taxation. It is evident that the legislature considers that 
otherwise men would dispense with the assistance of gov- 
ernment officers, and accomplish such transfers as they 
desire by other means. In fact, lawyers know very well 
that a transfer of property to take effect on the death of a 
certain person requires the aid of the government, unless 
the legislature interposes, no more than a transfer taking 
effect on any other future contingency. The claim that 
death taxes are a charge for services rendered by govern- 
ment seems therefore inadmissible. 1 It seems to be com- 
pletely disposed of by the fact that the English statute is 
retroactive, and treats a gift made within a year of death 
as an evasion of the tax, unless the giver absolutely divests 
himself of all beneficial interest in the property. 

1 In England property was formerly administered through the 
Probate Courts to a much smaller extent than in this country. Landed 
property, especially, did not pass by will; the title to great estates 
being transmitted through those peculiar trust deeds known as settle- 
ments. But the later returns of the death duties show that compara- 
tively little personalty is settled, and that landed property is, relatively, 
much diminished in value; although much more of it than of person- 
alty is settled. The law of primogeniture, it may be added, applying 
only where there is no will or settlement, is very far from having the 
importance sometimes attached to it by writers in this country. 



TRANSFERS OF PROPERTY AT DEATH 215 

A more subtle suggestion has been made, and almost 
universally adopted by the courts, to the effect that no 
right exists in any living person to take the property of a 
decedent, except such a right as is conferred by statute. 
This proposition rests substantially on a restricted view 
of the doctrine of natural rights ; it being asserted that no 
one has a natural right to succeed to the ownership of 
wealth on the death of its possessor, while he has a natural 
right to obtain such ownership during the possessor's life. 
We have already considered the uses of the term " natural," 
and it is unnecessary to review the discussion. We are 
concerned not with what the courts declare to be the law, 
but with what men hold to be just; and, upon reflection, 
we find that no principles of justice other than those already 
recognized are applicable in this case. So far as common 
usage is concerned, it cannot be denied that men speak of 
the natural right of widows and children to retain the 
house and goods, title to which was vested in the dead 
father, but the acquisition of which may have been ac- 
complished through the combined labors of all the members 
of the family. Historically, as we have seen, family, 
rather than individual, ownership prevailed in early times, 
and if we use the term " natural " as meaning what has 
been customary, it can hardly be denied that the surviving 
members of a family have a natural right of inheritance. 
ISTor, within certain limits, does the result seem different 
if the term is used in the sense of what ought justly to be; 
for it seems impossible to disregard the claims of widows 
and children. 

In order to maintain a position which has not seemed 
very defensible, legally, to many of the profession, the 
courts have resorted to an even more subtle distinction. A 



216 THE METHODS OF TAXATION 

tax on the transfer of property, it is said, is not a tax on the 
property itself; and in the case of bonds of the United 
States, which are by their terms exempt from taxation in 
any form by other authorities, and from the payment of all 
taxes or duties of the United States, it has been actually 
held legal for state legislatures to tax banks and similar 
institutions according to their holdings of such bonds, and 
they have been declared to be taxable by the United States 
on the death of their owner. 1 

But, although this distinction is established by law, it 
seems impossible to maintain it upon ethical grounds, and 
it finds no support in experience. When one buys some- 
thing in reliance on the promise of the seller that it shall 
be exempt from taxation in any form, he unquestionably 
considers that he has been defrauded when he finds that he 
cannot transfer the thing without its being subjected to a 
tax. It admits of no question that when two things other- 
wise of equal value are offered in the market, one of which 
can be transferred freely, while the other can be trans- 
ferred only at some expense, the former will command the 
higher price. In actual bargaining, the circumstance that 

1 "Taxes of this general character are universally deemed to relate, 
not to property eo nomine, but to its passage by will or by descent in 
cases of intestacy, as distinguished from taxes imposed on property, 
real or personal as such, because of its ownership and possession." 
Knowlton v. Moore, U. S. S. C. Rep. 178. In the course of the opinion 
it is to be noted that the Court uses words in their usual sense, "The 
same person," it is remarked, "taking equal legacies from different 
persons, would pay," etc. So too a legacy tax is spoken of as affecting 
the "taxation of the property of one person," etc. It may be remarked 
that this Court has held that a tax on the occupation of an importer is 
the same as a tax on imports; that a tax on the income of United 
States bonds is a tax on the bonds ; that a tax on a bill of lading is a tax 
on the goods ; that a tax on sales made by auction is a tax on the things 
sold ; that a tax on rents is a tax on real estate ; and in general that to 
tax the use of property is to tax the property whose only value consists 
in its usefulness. 



TRANSFERS OF PROPERTY AT DEATH 217 

the expense of effecting a transfer is declared not to be a 
tax on property eo nomine, but upon the transaction, is 
perfectly immaterial. For all practical purposes, a tax on 
the transfer of a thing is a tax on the thing; and in fact 
the law makes the tax on the transfer a lien on the thing. 
It will scarcely be contended that property subject to lien 
is so valuable as if it were free ; and no one would venture 
to maintain the proposition that a government bond that 
may be subjected to taxation to an indefinite amount when 
it is transferred, could be sold for so much as one that 
should be really as well as nominally exempt from taxation 
in every form. Under the general property tax, intangible 
personal property is in practice so commonly exempt as to 
make it comparatively immaterial whether a bond is by 
its terms free from taxation or not ; but this is because the 
ordinary buyer does not expect to pay the tax, and there- 
fore ignores it. Did he believe that he would be obliged 
to pay it, he would give the preference to non-taxable 
bonds. 

It seems, therefore, that death taxes cannot be justified 
on the ground that a legal distinction has been made be- 
tween taxing property and taxing the transfer of property. 
Value means ordinarily value in exchange; and it is les- 
sened by whatever hinders exchange. It is true that a 
transfer at death appears to differ from ordinary barter; 
one party is not in position to receive the consideration for 
the transfer. But it frequently happens that the consider- 
ation has been already received ; the decedent has received 
value in the shape of services, or in substantial goods, for 
which he pays by means of a legacy. Frequently, also, 
the property standing in the name of the decedent, is, as 
we have seen, family property, and the transfer of title at 
his death amounts to no more than a declaration of the 



218 THE METHODS OF TAXATION 

values of the several interests. Moreover, no consideration 
passes when a living person makes a gift to another; the 
transaction is essentially no more an exchange than in the 
case of a legacy. Since a valuable consideration fre- 
quently exists for a transfer after death, and since it fre- 
quently does not exist when the transfer is between living 
persons, its absence cannot be regarded as constituting the 
justification of death taxes. 

Nor does the fact that the estate possessed at the moment 
of death is large appear to justify such taxation. For, as 
we have seen, it is thought just that those who render great 
services should be liberally compensated; and, in spite of 
popular clamor, we must hold that the community is often 
benefited through the acquisition of wealth, even in large 
amounts. The wealth may have been fairly earned by 
great services, it may have been employed in enterprises 
profitable to the community, it may have supported schools 
and hospitals, and it may be intended for such uses after 
the death of the possessor. In such cases neither the acqui- 
sition nor the expenditure of wealth can be regarded as 
unfavorable to that equality of opportunity which justice 
demands, and there is certainly no presumption that if 
great wealth is seized by the rulers it will be expended by 
them so as better to promote such equality. Even if lega- 
cies for charitable purposes are exempted, we cannot be 
sure that they will not be diminished if death taxes are 
levied on other legacies; and we know that in countries 
where such taxes have long existed the endowment of public 
institutions by private persons does not prevail as it has 
hitherto prevailed in this country. It is quite conceivable 
that the present total of charitable bequests might be de- 
creased by the whole amount of the death taxes ; in which 



TRANSFERS OF PROPERTY AT DEATH 219 

case the interests of the community might suffer, unless in 
the improbable event that all the proceeds of such taxation 
should be applied to charitable uses. When the possessor 
of five millions knows that the government will seize one- 
fifth of his estate on his death, he will presumptively not 
make the same disposition of his property as he would in 
the absence of such taxation. If he had proposed to apply 
a million to charity, he may reason that as the government 
has taken that sum from him, he is relieved from whatever 
obligation he had felt to the community. 

These illustrations are from cases where great wealth has 
been well acquired and well administered ; but many men 
get rich by iniquitous methods and there seems to be a 
confused feeling that they are somehow punished and that 
justice is thereby attained when a part of their wealth is 
confiscated after they can no longer enjoy it. No doubt it 
is true that the anticipation of such a result is painful ; the 
pleasure of the possession of great wealth must be dimin- 
ished by the knowledge that it cannot be disposed of ac- 
cording to the will of the possessor. But it is extremely 
doubtful if punishment of this kind is efficacious as a de- 
terrent. Unscrupulous men are not apt to be prevented 
from taking unfair advantage of their neighbors by the 
reflection that after they are dead their estates will be 
heavily taxed; they do not hesitate to face much greater 
risks than this. And perhaps we might fairly reason from 
historical example that such men are peculiarly apt to 
compound for their sinful practices in this life by liberal 
gifts to charitable purposes after they die, and that they 
may feel that absolution will be sufficiently secured through 
payment of death taxes. Our knowledge of the motives 
that will become operative in such circumstances is really 



220 THE METHODS OF TAXATION 

so imperfect as to make our conclusions very uncertain; 
still we know that it is customary in England to effect 
insurance against the damage to estates caused by the death 
duties, just as it is customary to insure buildings against 
damage caused by fire, and we may safely infer that their 
effect cannot usually be to arouse in those who pay them 
an inclination to confer benefits on the society that exacts 
them. It seems on the whole probable that when such 
taxes prevail, the quantity of wealth left by decedents to 
charitable uses may be considerably decreased, and that 
to a certain extent the intended removal of inequality may 
therefore not be attained. 

We have hitherto regarded chiefly the effect of these 
taxes on those who leave property ; but it seems rather that 
the real sufferers are those who take the property dimin- 
ished by taxation. The decedent may have been aggrieved 
that his will should be thwarted; but the survivors are 
actually deprived of wealth that they would otherwise have 
enjoyed. Our proper inquiry, therefore, is concerning the 
justice of such deprivation. Now when the estate left by 
the head of a family is small, it is ordinarily a cruel injus- 
tice to diminish the amounts that would naturally go to 
the widow and children. In most cases the father was pre- 
sumptively supporting the family, and his death must 
seriously decrease their income; while the cost of an ill- 
ness, perhaps prolonged for months or years, and the 
funeral expenses, often constitute a crushing burden. For 
the government to increase this burden seems wholly irrec- 
oncilable with any admitted principle of justice, and 
notoriously arouses the bitterest indignation on the part 
of the sufferers. In the case of small estates, therefore, 
taxes imposed on widows and lineal descendants may be 



TRANSFERS OF PROPERTY AT DEATH 221 

condemned without qualification ; and in such case it must 
frequently be unjust to tax legacies. 1 

The progressive method, however, should exempt small 
estates from taxation; and, if consistently applied, it 
would seem properly to exempt small legacies, whether 
derived from small or large estates. For its principle is 
that the possession of a great amount of wealth by one who 
has done nothing to earn it is unjust. It may often be the 
case that the recipient of a moderate bequest has done some- 
thing to earn it, and to avoid injustice it seems necessary 
to exempt all such recipients. It can perhaps seldom be 
the case that the recipient of a very large bequest has ren- 
dered any equivalent service, and the taxation of such 
bequests is, theoretically at least, justifiable. Mill, indeed, 
proposed to limit the amount that any person should ac- 
quire in this way; but in our federal state such a restric- 
tion would hardly be practicable. It must be added that, 
in the case of very large estates, to tax moderately the 
shares of widows and children can cause them no great 
distress. They may be compelled to live more modestly, 
but they will usually be deprived of nothing essential to 
their welfare. Death taxes, therefore, restricted in the 
manner above indicated, seem adapted to the application 
of the progressive method ; and, if we regard the commun- 
ity as consisting of two classes of persons, the rich and the 
poor, they appear to satisfy the requirements of justice as 
between these classes. 

1 "The death of a father, to such of his children as live in the same 
house with him, is seldom attended with any increase, and frequently 
with a considerable diminution of revenue ; by the loss of his industry, 
of his office, or of some life-rent estate, of which he may have been in 
possession. The tax would be cruel and oppressive which aggravated 
their loss by taking from them any part of his succession." A. Smith, 
Wealth of Nations, Book V, Chap. II, Art. II, Appendix. 



222 THE METHODS OF TAXATION 

As between the individuals forming the class of the rich, 
this is less true. The circumstances of two persons, each 
of whom receives a legacy of the same amount, can never be 
quite the same, and must often be extremely different. But 
the tax-gatherer cannot inquire whether the legatee is 
young or old, male or female, feeble or vigorous, competent 
or incompetent, or even comparatively rich or poor. Some 
distinction may be recognized between relatives and 
strangers in blood; but the sole important differentia is 
the magnitude of the legacy. And it is to be considered 
that, in the case of large estates, it is often practicable for 
the owner to accomplish during his lifetime those private 
benefactions which men are perhaps usually prone to ne- 
glect until death forbids longer postponement. 

Such beneficence during life might, it is true, some- 
times diminish the accumulation of wealth; and it has 
been maintained that the English death duties have this 
effect. This objection, however, is properly one to the 
amount of the tax rather than to its nature. The very high 
English death duties have been only recently imposed, and 
we must wait a generation before we can form a conclusion 
as to the various effects which they will produce. For the 
same reason we are at present unable to judge how far such 
taxes may operate to discourage prudent and sagacious men 
from venturing on undertakings which may promise to be 
highly advantageous to the community as well as to them- 
selves, but which require much time for their completion. 
The possibility of death is in itself a deterrent that we 
know to be frequently operative, and the certainty that 
death will involve a serious diminution of property can- 
not be without effect. Sometimes, too, the disposition to 
spend during life may be intensified by the knowledge that 



TRANSFERS OF PROPERTY AT DEATH 223 

much of what is not spent will be appropriated by the 
officers of government. 

As has often been remarked, taxes of this kind are " un- 
thrifty " taxes ; they must ordinarily be paid out of the 
capital of a country, rather than out of its income. It may 
sometimes happen that the legatee is already rich, and may 
be able to pay the tax out of the income from property 
already owned; but this would not usually be true. On 
the other hand, the legatee may be disposed to repair the 
damage to his estate by reducing his expenditure for some 
years, and applying his savings to the increase of his prin- 
cipal. But such savings may be offset by a succession of 
deaths that cause the tax to be repeated a number of times 
within a few years, with the effect, possibly, of confiscating 
half the value of the estate. 1 Very great inequality of sac- 
rifice may thus be occasioned, and the English statute makes 
some allowance for the distress produced by this injustice; 
but, as we have pointed out, there is little pretence that 
death taxes are levied so as to cause equality of sacrifice 
among those who pay them. Their avowed purpose is to 
impose exceptionally heavy burdens on the rich, in order 
to exempt the poor ; and, in a community where the major- 
ity rules, such a policy may seem so imperatively demanded 
by justice, as to cause the injustice of taxing rich people 
unequally to be regarded with comparative indifference. 

1 In the debate on the budget of 1853, Sir J. Trollope mentioned a 
case where there had been only one succession to an estate since 1756. 
On the other hand, he said, he knew of a family where there had been 
seven successions within sixty-six years, and in four cases these suc- 
cessions took place within one year of each other. In a recent instance, 
within four days after a very heavy tax had become due, another of 
nearly equal size followed. Another eminent conveyancer stated that 
he had found in his practice that the average interval between succes- 
sions was about twenty years. The average age of successors seems to 
be about forty-four years. 



224 THE METHODS OF TAXATION 

Still, recognized principles of justice cannot be ignored, 
and if they are grossly violated by death taxes, we must 
inquire whether that supreme end of equalizing opportunity 
cannot be otherwise attained. The purpose is not merely 
to take their wealth from the rich; it is to take such 
wealth so as to diminish the burdens of the poor. As a 
matter of fact, in very few cases has the imposition of pro- 
gressive death taxes been followed by any remission of the 
taxes paid by the common people, 1 the revenue derived hav- 
ing been largely applied to increased military expenditure, 
or to extravagant and unproductive public works. Yet we 
cannot assert positively that such results will always pre- 
vail when the progressive method is applied; we cannot 
carry on our investigation unless we assume that the rev- 
enue obtained by the government is mainly expended for 
the benefit of the community. It seems clear that if pro- 
gressive death taxes really reduce the capital of a country, 
they tend to impair the condition of the common people 
by decreasing the fund which supports them. But this 
objection, as has been pointed out, applies to the injudi- 
cious extension of the progressive principle, and not to 
the progressive principle itself; nor would it be easy to 
prove that in practice the capital of any country has in 
modern times been seriously reduced by such taxation, 
whatever may have been true in the past. 2 



1 It should be said that in his budgets Mr. Gladstone consistently 
labored to attain this result. 

2 Prof. Sidgwick, testifying before the Commission on Local Taxa- 
tion in 1899, said that it could hardly be doubted that if the death 
duties, then some £14,000,000, had not been exacted from beneficiaries, 
by far the larger part would have been treated as capital. His conclu- 
sion was "that a diminution in the capital annually saved does tend to 
result from these duties ; and that in consequence a slight tendency to 
raise the rate of interest and thereby compensate for a portion of the 



TRANSFERS OF PROPERTY AT DEATH 225 

Some reference has been made above to the practice 
of insuring against the damage to estates caused by the 
death taxes, and it is plain that if this practice became 
general, the real burden of these duties might fall else- 
where than as stated. Doubtless it is impracticable to 
obtain the information necessary to determine the extent 
of this practice; and perhaps the cost of insurance can- 
not as yet be accurately known. It is evident, however, 
that the effect of the practice is to exempt the shares of 
beneficiaries of decedent's estates from the diminution 
presumptively to be caused by the taxes. Whatever the 
amount of the tax levied by the government, that amount 
is repaid by the insurance company to the beneficiary. 
The premiums on such policies of insurance, however, 
have been paid by the decedent during his life. They have 
constituted a diminution of his income, precisely as the 
income tax constitutes such a diminution. Apparently, 
then, the burden of the death taxes may really be borne, 
not by the beneficiaries, but by the owners of the estates 

burden laid by the duties on the owners of capital may reasonably be 
assumed." Prof. A. Marshall expressed similar views. The consider- 
able rise of the rate of interest since 1899 may be regarded as a con- 
firmation of these propositions; and they may be extended so as to 
apply to laborers, whose compensation may be lessened by the greater 
cost of obtaining capital. Prof. Sidgwick's opinion is confirmed by 
some investigations made by the Statist, covering the three years 1890, 
1891, and 1892. About 140 estates valued at over £100,000 were sub- 
jected to death taxes in each of those years. It is to be observed in 
the first place that the size of these estates is largely due to the great age 
of those who acquired them. Thus among the 138 persons dying in 1891 
possessed of estates of this size, 40 were between 76 and 95 years old ; 
their average age being 83, and 33 of them being over 80. In the 
second place, the Statist declares, it is the judgment of men conversant 
with business that hardly one of these estates was the result of finan- 
cial speculation. Property thus accumulated must to a great extent 
belong to the capital fund of a country, and to tax it heavily must 
tend to diminish that capital. 

15 



226 THE METHODS OF TAXATION 

taxed, who have deprived themselves, perhaps for many 
years, of a part of their income. But even so much as 
this cannot be positively asserted. The sum necessary to 
meet these premiums may have been taken by the dece- 
dent out of that part of his income that he had devoted to 
the maintenance of his family. His personal expense may 
or may not have been altered. He may deny himself some 
comforts or luxuries; or he may cease to provide for his 
"wife and children some of the luxuries and comforts to 
which they have been used. In the latter event, as the 
wife and children are presumptively the future owners 
of the estate, they will have paid the tax on the succes- 
sion in advance, out of the results of their previous 
abstinence. 1 

These considerations tend to support the view that death 
taxes may eventually become elements in the cost of pro- 
duction calculable in the same manner as damage from 
fire and flood and burglary. It may not become customary 

1 Sir H. Primrose, Chairman of the Board of Inland Revenue, cal- 
culates that the estate duty amounts to an income tax of 6d. in the 
pound on estates yielding an income from £40 to £400 a year, Is. on 
estates from £4,000 to £6,000, and Is. S^d. on £40,000 a year and up- 
wards. If the calculation is based on what the beneficiary or successor 
receives, the figures would be respectively 9d., Is. Qd. and 2s. in the 
pound. But this calculation omits the legacy and succession duties, 
which come to nearly £4,000,000. Were these included the computed 
income tax would be greater by perhaps twenty-five or thirty per cent. 

Since this calculation was made, the death duties have been in- 
creased on estates of £150,000 and over. From £150,000 to £250,000 
the tax has been raised from 6£ to 7 per cent ; from £250,000 to 
£500,000, from 7 to 8 per cent; from £500,000 to £750,000, from 
7£ to 9 per cent; and when the estate is over £1,000,000, it is taxed at 
10 per cent on the first million, and at advancing rates on the excess 
over a million, so that an estate of £3,000,000 and over would pay a 
tax of 15 per cent on this excess. A legacy duty of 10 per cent might 
be added to this; and as the estate might have to pay taxes in more 
than one jurisdiction, to say nothing of legal expenses, the supposed 
evil of great fortunes would seem in a way to be soon eradicated. 



TRANSFERS OF PROPERTY AT DEATH 227 

in this country to insure against them specifically as is 
done in England, where one can insure against almost 
any conceivable occurrence; but the practice of life in- 
surance accomplishes the same purpose. A man insures 
his life that his family may not be left without resources 
on his death, and it matters not whether their resources 
shall be diminished by the exactions of rulers, or by some 
other cause. We can safely infer from the vast extent 
of life insurance that the desire to provide for the family 
after death is extremely powerful, and it is legitimate to 
reason that the payment of death taxes will before long 
become an element in the calculations of prudent men. 
Some of them will arrange to dispense with the interfer- 
ence of the officers of government in disposing of their 
estates; some will make allowance for the probable loss 
from this cause in effecting insurance on their lives, and 
reduce their expenses by the amount necessary for the 
increased premiums ; some, differently situated, will spend 
while living that which they would have bequeathed, buy- 
ing life annuities or consuming their principal directly; 
some will try to increase their wealth so as to make up for 
the anticipated loss; some will think it not worth while 
to save money for the benefit of tax-gatherers and place- 
holders, and will prefer easier relations and fewer respon- 
sibilities than attend marriage and the rearing of children. 
The objection that these taxes necessarily result in great 
inequality of sacrifice on the part of those who pay them 
is a very serious one. It is impossible for the legislature 
to ascertain the circumstances of the individual legatee; 
no practical scheme of such a kind has ever been brought 
forward. There has been, we have remarked, some at- 
tempt in England to alleviate the sacrifices that may be 



228 THE METHODS OF TAXATION 

caused when several deaths occur in a family within a few 
years; the statute attempts to avert the ruin that might 
thus be brought upon an estate. Possibly this particular 
injustice may admit of a partial remedy; but its victims 
will naturally entertain very bitter feelings toward a com- 
munity that, as they look on the matter, has robbed them. 
It is of no consequence that the community maintains that 
such feeling is improper and disloyal. The feeling will 
exist so long as the cause for it exists, and it is certainly 
a serious evil when any considerable number of citizens 
feels that it has been oppressed and plundered. Yet this 
evil also may be mitigated, if not removed, by exempting 
legacies even of considerable size from taxation, and by 
applying the progressive method to large legacies with 
moderation. 

A very grave objection to these taxes appears when we 
consider the expense of collecting them. This expense is 
commonly measured by the amount of the fees and salaries 
paid to the tax-gatherers; a mode of computation that is 
grossly inadequate. The government is put to additional 
expense for the rent of offices, etc. ; but the chief expense 
falls on those entitled to the estate of the decedent. When 
the property is small, and simple in character, and when 
it passes directly by bequest or devise or inheritance into 
absolute ownership, it may be practicable to administer 
the estate without legal aid. But it is only necessary to 
read the statutes on this subject in order to see that prob- 
lems must arise in most cases that are quite insoluble by 
the ordinary layman, and that frequently demand judicial 
settlement. 1 In fact, it may be doubted whether the or- 

1 Both in England and in this country the statutes provide that 
where the difficulty of determining the amount of the tax becomes very 



TRANSFERS OF PROPERTY AT DEATH 229 

dinary " business man " could comprehend these statutes 
at all, especially since it often happens that those of sev- 
eral jurisdictions must be consulted. When the property 
is of many varieties, and especially when estates not in 
fee simple are created, expert appraisers and counsel must 
be employed, not only to advise but also to carry on the 
proceedings; and in such cases the cost to the estate of 
preparing to pay the tax may often equal or exceed the 
amount of the tax itself, and is perhaps, as a rule, more 
than the cost to the government of collecting it. The ex- 
pense is sometimes increased by the practice of rewarding 
the tax-gatherers by fees, which have, in the case of some 
large estates, been enormous. When the collection of a 
tax involves so much expense as this, it can be defended 
as just, if at all, only by clear proof that by no other 
means can the desired equality of opportunity be attained. 
An objection, of which it is difficult to estimate the 
force, relates to the possibility of avoiding the tax. 1 It is 

great, the tax collectors are empowered to fix it at such a figure as they 
think proper. When governments are steeped in corruption it is easy 
to see that abuses may result from lodging such arbitrary power in the 
hands of tax-gatherers. 

1 Prior to 1853 the death duties in England were comparatively 
light, but were nevertheless to a great extent avoided. Gladstone re- 
marked of this (although the conveyancers contradicted him), "With 
respect to personal property we know that the astuteness of lawyers 
and the vigilant care for personal interests continually are at work to 
defeat and escape the operation of the law — to invent new modes of 
escaping the legacy duty — and this with such extraordinary success 
that although there has been an immense increase in the personal prop- 
erty of the country, such increase is scarcely traceable in the tables of 
your legacy duty ; and we know this, that arrangements are made for 
that end which may be called all but fraudulent." He expected to get 
£2,000,000 from his increased taxes, but got only £800,000, and Sir 
W. Harcourt remarked in 1894 that even then, after nearly forty 
years, these taxes produced only three-fourths of the amount 
anticipated. 



230 THE METHODS OF TAXATION 

urged that by gifts during life, and by certain expedients 
with which lawyers are familiar, men may effect the dis- 
tribution of their estates without subjecting them to taxa- 
tion. Premature death, however, may interrupt such ar- 
rangements, and in such event there will be discrimination 
against the unfortunate. But, on the theory that bene- 
ficiaries are the real sufferers, it is evident that unless 
they have been taken into the confidence of the decedent, 
they can do little or nothing to avoid the tax. They may 
foresee it, and understand how it can be avoided; but 
they are helpless. It seems altogether impossible at pres- 
ent even to conjecture to what extent men plan to avoid 
these taxes, which have been applied but a few years, and 
which are not yet fully understood. Hitherto, it may 
perhaps be thought, the indications are that most rich 
men have allowed their estates to be taxed; and if the 
burden is not very heavy, they may choose to bear it, rather 
than undergo the trouble of evading it. Aged men, espe- 
cially, who are often weary of the cares of life, and de- 
sirous chiefly of passing the remainder of their days in 
peace, sometimes appear indifferent to what happens after 
they are gone. They have learned how difficult it is to 
anticipate the course of events, and how often the arrange- 
ments that men make for the future prove disappointing; 
they have perhaps seen that great legacies prove occasion- 
ally a curse rather than a blessing to those that receive 
them. Hence the prospect that the government will seize 
a large part of their property, after they have ceased to 
enjoy it, may not appal them; they may even regard it 
with indifference, or be willing to relieve themselves of 
the care of selecting desirable objects of beneficence by 
leaving the task to the legislature. !Nor may we ignore 



TRANSFERS OF PROPERTY AT DEATH 231 

the desperate tenacity with which the aged often cling 
to that dominion of which they know that death alone 
can deprive them. But of these matters experience as yet 
tells us little; we have never before in this country had 
legislation directed against the wealthy as a class, and 
no one can tell what its ultimate results may be. But at 
least it may be said that the death tax does not occasion 
the outrageous injustice of the general property tax, and 
that if it could be substituted for the latter, and graduated 
as the theory on which it rests requires, justice would 
be much more nearly attained than at present. 

It is to be remarked, however, that the death taxes 
imposed by our legislatures make no pretence, as a rule, 
of complying with any principle of justice whatever. They 
are usually cruel, because levied on small estates, and 
because they reduce the shares not only of strangers and 
collateral relatives, but also those of widows and orphans. 
They seem to be, with few exceptions, imposed on the 
estate of the decedent and graduated accordingly, rather 
than regulated by the size of legacies ; although the latter 
principle was adopted in the United States statute of 
1898, and is partially recognized in the laws of some 
states, as of Massachusetts. What is peculiarly inde- 
fensible, and calculated to arouse the most bitter animos- 
ity toward the government on the part of the sufferers, 
is the fact that the laws of the different states often cause 
the tax to be levied several times on the same estate. A 
resident of Connecticut, for instance, may own stock in 
a foreign corporation, and keep the certificates that de- 
clare his interest in a vault in the city of New York. 
His legatees may find themselves mulcted not in one state 
but in three. For this injustice the legislature of JSTew 



232 THE METHODS OF TAXATION 

York is primarily responsible; and in order to exact 
an impost for which no justification exists, it has resorted 
to the infamous practice — in which it has been imitated 
by some other states — of offering rewards to informers 
who succeed in discovering within its jurisdiction prop- 
erty, or the evidences of or claims to property, belonging 
to the estates of non-resident decedents. It seems clear 
that a certificate of stock, or a parchment declaring an 
indebtedness, has no value except for evidential purposes ; 
the stock may be without the jurisdiction, and so may 
be both the debtor and creditor, and it is where the value 
exists that the tax for protecting it should be imposed. 1 
There is possibly some hope that interstate comity may 
in time correct these scandalous abuses. 

E"o doubt the death taxes now generally adopted in this 
country constitute a serious innovation. With very few 
exceptions, our governments until recently exacted no fine 
from those who succeeded to property, and recognized no 
such principle of taxation as that of the progressive method. 
That principle, however, has now been accepted by the 
legislatures, and probably by the mass of the people. If 
it has been permanently established, there must be some 
modification of the rights of property, and of the princi- 
ples of justice affecting those rights. The process of re- 
adjustment cannot be watched without anxiety; but we 
do not here examine its political and social consequences. 2 

1 It is difficult to take seriously the claim of one of the judges of the 
New York Court of Appeals, that as some decedents might very likely 
have evaded personal property taxes when living, all personal property 
should be made to pay death taxes. This theory of justice seems to be 
that adopted by Herod in ordering the slaughter of the innocents ; but 
it is perhaps to be explained by the confusion of thought due to attrib- 
uting moral delinquency to such an entity as personal property. 

2 It is somewhat remarkable that Mr. Gladstone stood in fear of the 



TRANSFERS OF PROPERTY AT DEATH 233 

No amount of discouragement, or even persecution, to 
judge from experience, has availed to extinguish the be- 
nevolence of mankind. Yet it is conceivable that very 
drastic measures of taxation may go far to accomplish this 
result, and that if rich men feel that they are singled 
out for plunder, they may relieve themselves of responsi- 
bilities hitherto voluntarily assumed. In fact it is con- 
tended by some persons that what is now done by 
charitable men should be done by the officers of gov- 
ernment; that what the poor have received as alms 
shall now be turned over to them as a debt owed by the 
society whose institutions, it is said, have caused their 
poverty. 

The social consequences, however, of excluding the be- 
nevolent emotions from their usual field may be very 
disastrous ; the result in France, it might almost be said, 
has been to replace charity with hatred. No society is 
sound when its government is hated by a considerable 
portion of its better educated citizens; nor, perhaps, will 
it prove to be sounder when the mass of its poorer citizens 
have been taught that the easiest way to obtain wealth 
is to take it from the rich by means of taxation. The 
benevolent emotions must still have some play; when we 

spirit that he had done so much to evoke. He dreaded the results of 
suggesting to the common people the idea that they might throw the 
whole burden of taxation upon the rich. When in opposition, in 1876, 
he declared that those with whom he acted should oppose, not as Lib- 
erals, but "as men of honor and prudent men," the policy of abating 
the tax on small incomes; "a measure the obvious purpose of which 
is to relieve the larger and more numerous classes of society at the 
expense of the more limited and wealthier." This is a proposal, he 
added, "by which I will not say you bribe the majority, but by which 
you induce the majority of the actual taxpayers to acquiesce in the 
increase of a tax by making that increase positively and absolutely 
beneficial to them. You encourage them to run in upon the minority." 



234 THE METHODS OF TAXATION 

consider the thousand ways, public and private, in which 
the well-to-do people of this country, as a class, are, in 
season and — sometimes — out of season, endeavoring to 
make the lives of their less fortunate neighbors happier and 
better, we cannot imagine that these emotions will cease 
to exist. But we can imagine that they will be restricted, 
and that with the diminution of the means for exercising 
them, the importance of the self-regarding emotions will 
be increased. On the other hand, gratitude for benefac- 
tions will cease when they are taken as rights ; but it may 
be found that it was gratitude by which envy was held 
in leash. The meanest of passions may be treated with 
contempt when exhibited by an individual. When it 
animates a democracy its power becomes too formidable 
to be despised. 1 

x In 1907 an "arrangement" was entered into by the governments of 
France and England (without the authority of either parliament), 
which may justly be characterized as disgraceful to the English people. 
The Inland Revenue Board is to furnish to the direction generate de 
Venregistrement such information as it acquires concerning the estates 
of deceased persons whose domicile was in France, and reciprocally. 
Of this arrangement M. Paul Leroy Beaulieu observes that neither 
government relinquishes its claims to tax the estate of a foreigner; 
hence the only purpose of the arrangement is to impose double taxa- 
tion. "Cela etant, on a le droit de dire que c'est la ' un arrangement ' 
tout a fait illegitime et manifestement immoral; car, en 6quit6, cette 
succession ne doit pas deux droits; elle n'en doit qu'un." He calculates 
that only in rare cases would the cumulated tax on direct successions 
be less than 6 or 7 per cent, and on others less than 15 to 18 per cent; 
to which must be added several per cent for legal expenses. The 
French government further proposes to penalize those who succeed to 
estates which Frenchmen have invested abroad, when they have not 
been subjected to taxation in France during the life of the owner, to the 
extent of one-quarter of such investments. We are not here considering 
the policy or the practice of the French government in taxation; 
but the comments of this distinguished economist on the character of 
this agreement deserve the attention of the English-speaking peoples. 
"Comment les moralistes peuvent-ils juger cet 'arrangement' entre 
le Gouvernement anglais et le Gouvernement francais, qui a pour 



TRANSFERS OF PROPERTY AT DEATH 235 

objet de faire payer deux droits, le droit anglais et le droit francais, a 
la meme succession? N'y a-t-il pas la un exemple des plus facheux, et 
quand les Gouvernements violent aussi manifestement les principes 
de P6quite\ sont-ils bien venus a se plaindre que les contribuables 
cherchent a e*chapper a leur excessive et inique fiscalitg?" 



CHAPTER VIII 

THE DIFFUSION OF TAXES 

The method adopted in prosecuting this inquiry has 
been rather historical than logical. This course has been 
followed because the result of an examination of the diffu- 
sion of taxes, which should logically precede historical 
investigations, might have been to make such investigations 
seem unnecessary. If taxes are not in fact a burden on 
those on whom the legislature intends them to fall, it might 
be thought a waste of time to consider methods and meas- 
ures of taxation which, so far as relates to equalizing sacri- 
fice, must fail of their purpose. But it is not probable that 
this cutting the ground from under all existing systems of 
taxation would have been found satisfactory. The pre- 
sumption in favor of what is established, simply because 
it exists, is with most people sufficient to overcome the 
weight of the most perfect logical demonstration. Hence 
it has seemed best to examine the practical operation of 
established methods, on the assumption that, if they were 
consistently applied, the burdens of taxation would rest 
where the legislature intended. It has from time to time 
appeared that this assumption is not altogether tenable ; but 
the inquiry would have been gravely complicated by paus- 
ing to examine its validity. We have now, however, reached 
a stage where this examination can no longer be postponed. 

The collection of taxes by government is by definition 
the same thing as the subtraction of a part of the wealth 
of its subjects. Some of these subjects, or all of them, 



THE DIFFUSION OF TAXES 237 

take money from their pockets and pay it to the tax- 
gatherer. But it is notorious that in all countries many of 
the subjects never pay any money to their governments; 
they may never even see a tax-gatherer. The government 
of the United States takes enormous sums of money from 
its subjects, but the persons who pay this money probably 
do not number two per cent of the population, if we leave 
out of view the money paid for postage, which is not usu- 
ally reckoned as a tax. The City of New York, or more 
precisely the Borough of Manhattan, collects a vast reve- 
nue, but not one in twenty-five of its inhabitants pays any 
part of it. The inhabitants number 2,200,000, but the 
number of parcels of real estate assessed is but 100,000, 
and the number of individual residents paying taxes on 
their own personal property is only 13,000. Common 
sense, however, revolts at the proposition that the wealth 
of the comparatively few persons who pay these prodigious 
sums is depleted to a corresponding extent ; that the duties 
paid by an importer in New York, or the taxes paid by a 
distiller in Illinois, diminish his property and that of no- 
body else. 1 It seems, therefore, that the sacrifice involved 
in taxation may not be made by the individual who pays 
the money to the government, but by other persons, and 
this transference of sacrifice is usually denominated the 
shifting or diffusion of taxation. It follows also that the 
intent of the legislature that particular persons shall pay 
the tax imposed by a general law constitutes no presump- 
tion that such persons will really carry the burden of the 

1 This is not clear to the minds of all our statesmen. A representa- 
tive of Illinois once maintained in Congress that the people of that state 
paid the taxes on the spirits distilled there, and a representative of New 
York made a like assertion concerning the duties on imports collected at 
the port of New York. 



238 THE METHODS OF TAXATION 

tax. That this is true in many cases, and to a great extent, 
is disputed by nobody; but in what cases, and to what 
extent, even if discoverable by experts, is not generally 
understood. 

As was explained at the outset, the scope of this inquiry 
cannot extend to the complete analysis of the effects imme- 
diately produced when a particular tax is first imposed. 
It is evident that a sudden and unforeseen demand for 
money made on an individual must be wholly different in 
its effects on his circumstances from a continuous and 
anticipated demand. The latter is taken into account in 
all those calculations concerning the expenses and profits of 
his occupation which every man must make; the former 
cannot be. While economists have carefully investigated 
the results of these unforeseen variations in the conditions 
of industry, and while their conclusions are of practical 
value when it is proposed to introduce changes in the sys- 
tem of taxation, the nature of our subject compels us to 
take but incidental notice of these investigations and con- 
clusions. All that we can here attempt is to ascertain the 
distribution of burdens under an established system of 
taxation ; a system, that is, where the laws imposing taxes 
are duly enacted by the legislature, and are changed only 
gradually, and with such warning as is implied in the 
obvious tendency of public opinion. The imposition of a 
new tax usually has many unexpected results, and it is 
idle to attempt the precise solution of a problem the ele- 
ments of which are altered while the investigation is taking 
place. In other words, taxes are to be regarded as known 
and calculable elements in the cost of the production and 
exchange of goods, in the sale of services, and in the dis- 
tribution of expenditure. 



THE DIFFUSION OF TAXES 239 

Some confusion of thought may perhaps be avoided if 
we distinguish, once for all, the unproductive expenditure 
of government from what has been called its remunera- 
tive expenditure. If a citizen pay to a private contractor 
the same sum for removing ashes from his house that he 
pays as a tax for the same service to the city government, 
the expenditure may be called remunerative. Similar rea- 
soning applies in the case of water rates. Charges of this 
description are not usually classified as taxes; and the 
charges for the post are by many writers also excluded. 
But much the greater part of the expenditure of govern- 
ment, however necessary it may be, is not remunerative. It 
would be absolutely impossible to apportion the benefits re- 
sulting from this expenditure amongst individual subjects, 
and the expenditure is unproductive in the sense of not re- 
placing the capital expended. It may be worth while for 
a nation at peace to spend $200,000,000 a year in prepara- 
tion for war, but if 200,000 farmers were to spend that 
amount in increasing the products of their land, the results 
to the wealth of the society would be very different. Every 
prudent man distinguishes his income from his outgo, and 
his productive from his unproductive expenditure. He 
regards his taxes as an element of cost; he deducts them 
from what he calls his profits, and never thinks of adding 
them to his revenue. Whatever criticism may be made 
of this system of classification, we are obliged to employ 
it because it is established and understood. To substitute 
another, even if it be theoretically more scientific, would 
be for most persons to render the whole subject of eco- 
nomics, as well as taxation, unintelligible. The only taxes 
here treated, therefore, are taxes that are, in the sense 
above explained, unremunerative. 



240 THE METHODS OF TAXATION 

The system of taxation, it should be observed, is a con- 
stant factor only in the sense that other economic factors 
are constant, i. e. to the extent that inferences may be 
drawn from them with reasonable certainty. The return 
of the seasons is a factor of this kind ; but no two summers 
are precisely similar. They are, however, so nearly similar 
that the farmer makes his plans on the assumption of their 
constancy. There may be more rain or less rain than he 
expected, but on the whole the quantity is sufficiently con- 
stant to form a basis for calculation; and so much con- 
stancy as this is to be assumed in the case of taxation. The 
rate is perhaps never quite the same in any two years, but 
the changes are not very great ; and, taking one year with 
another, they may be disregarded. It is to be added, how- 
ever, that in reasoning on this subject we are obliged to as- 
certain the effect of any tax by supposing it to be, on the 
one hand, newly imposed or increased; or, on the other 
hand, to be reduced or abolished. But this, it is appar- 
ent, is really an inquiry into the effect on men's calcula- 
tions of changes in the conditions of the industrial prob- 
lems which they are continually engaged in solving. It is 
the fact that men calculate, that they are beings looking 
before and after, that causes the diffusion of taxes. 

For in a modern industrial society most men are ani- 
mated with the desire to improve their condition and that 
of their families ; even, it may be paradoxically said, be- 
fore their families exist. This means that if men have 
services to sell, they will try to sell them for as high a price 
as possible; that if they have goods to sell, they will get 
as much for them as they can ; that if they have money to 
lend, they will obtain the highest interest available. On 
the other hand those who buy services will try to get them 



THE DIFFUSION OF TAXES 241 

cheap ; and so with goods, and so with money. It is hardly 
necessary to say that these propositions have no reference 
to prices actually received or paid. They do not mean 
that a laborer will prefer to get larger wages in a dangerous 
employment under a brutal master than in wholesome work 
under pleasant conditions; or that an employer will not 
pay higher wages to a competent and faithful laborer than 
to one who is drunken and dishonest. They do not mean 
that a merchant will try to sell bad things for as much as 
good ones, or will pay the same price for materials without 
regard to their quality. Nor do they mean that men entrust 
their money to the highest bidder, no matter who he may 
be. They mean simply that men exist in a competitive 
society, based on barter, and making use of borrowed cap- 
ital. If then a man pays high interest for his capital and 
high wages to his laborers, he cannot offer his products 
for sale at so low a price as his competitor, whose expenses 
of production are less; if he demands a higher price no- 
body will pay it, and if he takes a lower price he cannot 
pay his debts and must go into bankruptcy, a result that 
takes place in hundreds of thousands of cases every year. 
Whoever underestimates the amount that he will pay in 
taxes suffers in the same way that he suffers from under- 
estimating any other of the expenses of production. Before 
he engages in business he must calculate this amount, just 
as he calculates his disbursements for materials or ma- 
chinery. And in modern times he does not make his calcu- 
lations without assistance. As Bagehot so lucidly ex- 
plained, business has to be done now with borrowed money ; 
the men that borrow money can undersell those who have 
only their own capital. The lenders of money, however, 
constitute the most alert and astute body of men in exist- 

16 



242 THE METHODS OF TAXATION 

ence. Their business consists in letting other people have 
possession of their money, or, what is even more critical, 
of money which they themselves have borrowed. If they 
cannot get their money back they will be ruined, and their 
creditors with them. Hence they must exercise the great- 
est watchfulness over their debtors ; they will not lend in 
the first place until they are satisfied that the loan is safe, 
that the debtor can and will repay it, and they will not 
continue or increase the loan without evidence that the 
business of the debtor is prospering. They listen to his 
representations and to his calculations; and if they find 
them unsatisfactory they cease to give him credit. They 
are partners in all the business of the country, and they 
display in estimating the prospects of its several depart- 
ments an industry and an ability that are truly stupendous. 
The celerity with which men act on these calculations is, 
however, no modern phenomenon. It excited the admira- 
tion of Eicardo nearly a century ago, and his comments 
on it are so judicious as to deserve to be recalled. Speak- 
ing of temporary variations of price he remarks : 

" It is only in consequence of such variations that capital is 
apportioned precisely, in the requisite abundance and no more, 
to the production of the different commodities which happen 
to be in demand. With the rise or fall of price, profits are 
elevated above, or depressed below, their general level, and 
capital is either encouraged to enter into, or is warned to 
depart from, the particular employment in which the variation 
has taken place. 

" Whilst every man is free to employ his capital where he 
pleases, he will naturally seek for it that employment which 
is most advantageous. . . . This restless desire on the part of 
all the employers of stock, to quit a less profitable for a more 
advantageous business, has a strong tendency to equalize the 
rate of profits of all, or to fix them in such proportions as 



THE DIFFUSION OF TAXES 243 

may in the estimation of the parties compensate for any ad- 
vantage which one may have, or appear to have, over the other. 
It is perhaps very difficult to trace the steps by which this 
change is effected: it is probably effected by a manufacturer 
not absolutely changing his employment, but only lessening 
the quantity of capital he has in that employment. In all 
rich countries there is a number of men forming what is 
called the monied class; these men are engaged in no trade, 
but live on the interest of their money, which is employed in 
discounting bills, or in loans to the more industrious part of 
the community. The bankers too employ a large capital on 
the same objects. The capital so employed forms a circulat- 
ing capital of a large amount, and is employed, in larger or 
smaller proportions, by all the different trades of a country. 
There is perhaps no manufacturer, however rich, who limits 
his business to the extent that his own funds alone will allow ; 
he has always some portion of this floating capital, increasing 
or diminishing according to the demand for his commodities. 
"When the demand for silks increases, and that for cloth 
diminishes, the clothier does not remove with his capital to the 
silk trade, but he dismisses some of his workmen, he discon- 
tinues his demand for the loan from bankers and monied men ; 
while the case of the silk manufacturer is the reverse: he 
wishes to employ more workmen, and thus his motive for 
borrowing is increased : he borrows more, and thus capital is 
transferred from one employment to another, without the 
necessity of a manufacturer discontinuing his usual occupa- 
tion. When we look at the markets of a large town, and 
observe how regularly they are supplied both with home and 
foreign commodities, in the quantity in which they are re- 
quired, under all the circumstances of varying demand, arising 
from the caprice of taste, or a change in the amount of popula- 
tion, without often producing the effects of a glut from a too 
abundant supply, or an enormously high price from the supply 
being unequal to the demand, we must confess that the prin- 
ciple which apportions capital to each trade in the precise 
amount that it is required, is more active than is generally 
supposed." Pol. Ec, Chap. IV. 



244 THE METHODS OF TAXATION 

Other conditions beside those suggested by Eicardo may 
operate with similar results. Every year a certain number 
of those engaged in any trade retire or die ; and every year 
a certain number of young men attain a position which 
enables them to select the trade in which they will engage. 
Every year a certain number of factories are burned, and 
the money received from insurance may be employed in 
constructing factories for that trade or for any other that 
is preferred. Every year a certain quantity of machinery 
is worn out or becomes obsolete; it may or may not be 
replaced, as the owner chooses. Every year, in our coun- 
try, population increases and therewith the demand for 
goods; this increased demand may be more for one kind 
of goods than another, and capital will be employed ac- 
cordingly. Every year many manufacturers fail; their 
factories may thereafter be used to produce the same kind 
of goods as before, or a different kind. This wonderful 
elasticity in capital makes the withdrawal from an in- 
dustry in which the cost of production has increased a com- 
paratively simple and expeditious matter. And the fact 
that the increase in the cost of production is due to the 
imposition of a tax rather than to any other expense is 
immaterial. 

It seems, therefore, that a tax on a particular employ- 
ment will not entail a peculiar sacrifice on the persons fol- 
lowing that employment. If it were unexpectedly imposed 
it would indeed at first do so ; but we are assuming it to 
be an established impost. Hence the saying " An old tax 
is no tax " ; an old tax, as defined by Professor Sidgwick, 
being a tax " that has lasted long enough for the cessation 
of the effects of its first imposition, so far as industrial 
competition tends to do away with those effects." It fol- 



THE DIFFUSION OF TAXES 245 

lows then that licenses to pursue particular employments 
do not constitute a peculiar burden on the persons engaging 
in those employments. They are indeed an item of ex- 
pense; but this item, like the other expenses of the em- 
ployments, is taken into consideration by those who con- 
template engaging in them. Nor is it material, so far 
as sacrifice is concerned, whether the license fee is gradu- 
ated or not. If it is not graduated, but is the same in 
amount no matter how large the capital employed may be, 
it is of course a relatively heavier burden for the man with 
a small capital than for him that has a large one, and small 
capitals may seek other employment, thereby freeing the 
large capitals from their competition. If it is graduated, 
— although no system of licenses perhaps has ever been 
graduated with any near approach to proportionality, — 
both large and small capitals may be discouraged from en- 
gaging in the employment, thus freeing capitals already 
employed from the competition that they would suffer 
were no license fee exacted. 

In their reasoning on this subject some writers have 
fallen into a certain inaccuracy ; an inaccuracy from which 
Adam Smith was not altogether free. He observes: 
" Taxes upon the profits of stock in particular employ- 
ments can never affect the interest of money. Nobody will 
lend his money for less interest to those who exercise the 
taxed, than to those who exercise the untaxed employ- 
ments." On their face these propositions may appear self- 
evident, and the second of them is indisputable ; but it is 
not true that the interest of money can never be affected 
by a tax on a particular employment. Nobody, it may be 
presumed, will engage in a taxed employment unless he 
can make as much profit therein as in an untaxed employ- 



246 THE METHODS OF TAXATION 

ment, and if that cannot be done, the amount of capital 
used in the taxed employment will diminish. In order to 
equalize profits after a tax has been imposed, the product 
of the taxed employment must be sold at a price sufficient 
to compensate the producer for the tax. If the quantity 
sold at a higher price is the same as at the lower price, the 
buyers of the taxed product cannot buy so much as they did 
of untaxed products; they have spent more in one way 
and must spend less in others. In that event those engaged 
in the untaxed employments must produce a less quantity, 
if they are to sell it at the same price ; or, if they produce 
the same quantity, they must sell it at a lower price. In 
either case, if they are to make the same profit, they must 
reduce their expenses ; which means that they must borrow 
money at a lower rate of interest. If the rates of interest 
were not lowered, some of them would engage in the taxed 
employment, but some would go out of business altogether. 
Therefore, as the demand for money would fall, the rate 
of interest would also fall. 

If, however, the quantity of the product of the employ- 
ment is reduced, and it is sold at a higher price after the 
tax is imposed, the quantity of money needed in that em- 
ployment will be less, and the money no longer lent to those 
engaged therein must be lent to those exercising the untaxed 
employments. But it is not needed in those employments, 
for the buyers of such products have no more money to 
spend for them than they had before. The competition of 
lenders will therefore reduce the rate of interest, and those 
engaged in the untaxed employments will for a time make 
higher profits; but some of those engaged in the taxed 
employment will be attracted by these profits and endeavor 
to participate in them, while some will go out of business 



THE DIFFUSION OF TAXES 247 

altogether. Thus, it seems, a tax on a particular employ- 
ment, like any other event that increases the expense of 
production, may be felt throughout the whole industrial 
world; it may decrease the profits of employers, the in- 
terest of money lenders, the wages of laborers, and these 
effects may reappear in a loss to all these persons as mem- 
bers of the general body of consumers, who suffer because 
the total product of industry is less than it was before. The 
whole community is poorer; but to ascertain the relative 
losses of these different individuals in any concrete in- 
stance, or in any imaginable case, is a problem the solution 
of which is entirely beyond human powers. 

It is true that Adam Smith speaks of " taxes on the 
profits of stock in particular employments," but, as his 
second proposition shows, he means taxes on the employ- 
ments. In fact, there is no such thing as a tax on the 
profits of a particular employment, if by that is meant 
the respective profits of the individuals engaged therein. 
There are taxes on employments, and taxes on stock; but 
neither of them have any determinate relation to the actual 
profit of the individual trader, although they may affect 
it. The only specific tax on profits is the income tax ; but 
that is meant to be a tax on the net profits from all the 
employments and investments in which the individual is 
interested, some of which may be prosperous, and others 
not. He may, it is true, pay the whole tax out of the 
gains made in a particular employment ; but his neighbor 
who is also engaged in it may be losing money, and pay- 
ing his tax from some other source of revenue. In every 
concrete instance of an income tax, it must be observed, 
salaries, dividends, and interest are taxed, as well as 
what are called profits. The taxes on the sale of strong 



248 THE METHODS OF TAXATION 

drink are enormous; they may amount to as much as 
all the profits made by those engaged in that sale, and in 
a sense they may be said to be paid out of those profits. 
But there is no reason to suppose that such persons are 
content with any less rate of profit than persons in other 
occupations, and it can therefore be only misleading to 
speak of the tax on the sales that they make as a tax on 
their profits. 

In this connection an inordinately litigated matter, the 
taxation of loans secured by mortgages, may be consid- 
ered. Like the two knights of tradition, the defenders 
and the opponents of this tax, each seeing only one side 
of the shield, have necessarily fought a outrance. It 
admits of no question that to tax a mortgage as well 
as the property which is pledged for the payment of the 
mortgage, is in some sense double taxation. Debts form 
no part of the wealth of a community. Were all the in- 
debtedness of our country consolidated into an issue of 
government bonds, to an amount equal to all the tangible 
wealth of the inhabitants, the country would be no richer 
than if no one of its inhabitants owed a penny. The 
wealth of an individual is ascertained by subtracting his 
liabilities from his assets. If he mortgages his land to 
secure a loan, his creditor becomes the true owner of the 
land, subject to what is known at law as the equity of 
redemption retained by the borrower. In fact a mort- 
gage is still in form a deed, with a defeasance. The 
mortgagor remains in possession of the land, but only if 
he pays the interest on what he has borrowed, failing 
which the mortgagee takes possession. Of course there is 
some economic gain in the proceeding ; men borrow money 
because they can make more than the lenders by using it. 



THE DIFFUSION OF TAXES 249 

But this has no bearing on the matter; the value of the 
land is practically the same, whether mortgaged or not. 
A, who owns a farm, sells it to B, who has no money, for 
a consideration of $5,000, taking B's bond, secured by a 
purchase-money mortgage of the farm, for the payment 
of that sum. Until recently, in nearly all our states, A 
would then be assessed on $5,000, the value of the bond 
and mortgage, and B would be assessed on $5,000, the 
value of the farm. 'No value has been created; there is 
only the farm, but the assessment has been doubled, and 
double taxation results. 

There is, however, a certain ambiguity in the expression 
" double taxation." For let us suppose that all the wealth 
in the country belonged to one half of its inhabitants, and 
that they sold it to the other half, taking back mortgages 
for its full value. The assessment roll of the country 
would then be doubled, but the taxes would be the same 
in amount. They were in the first place all paid by the 
owners of the wealth; but they are now divided, half 
being paid by the former owners, as mortgagees, half by 
the mortgagors, the present owners. There would, it is 
true, be double assessment ; but the rate of taxation would 
be only one-half what it was before. The defenders of 
the tax on mortgages would maintain that an equitable 
distribution of burdens is thus provided. The taxes paid 
by the owners of the property mortgaged would be les- 
sened, and those paid by the mortgagees would be corre- 
spondingly increased. And it must be said that this is 
perfectly consistent with the theory of the general prop- 
erty tax. If all property is taxed, including choses in 
action, or claims in general, then by whatever amount is 
collected from the holders of claims, the amount collected 



250 THE METHODS OF TAXATION 

from the owners of the property affected by these claims 
will be reduced. If the general property tax is a proper 
measure of taxation, the taxation of mortgages is not only 
a proper but an essential element in this measure. 

But here the principle of the diffusion of taxes may 
be invoked. Disregarding the existence of usury laws — 
they are almost universally evaded where they do exist 
— the lenders of money may decline to make loans if they 
are to be taxed on them ; or, what is the same thing, they 
may consent to make them only if the borrower will pay 
the tax, or pay a proportionately higher rate of interest. 
That there is some truth in this contention appears from 
the fact that many legislatures have passed laws forbid- 
ding lenders to make contracts obligating the borrowers 
to pay such taxes. It also appears from the fact that 
where such laws exist the rate of interest on mortgage 
loans may be" considerably higher than that on others. 1 
The result of the legislative attempt to tax the lender 
would thus seem to be to throw the tax backward upon 
the borrower. As the borrower is already taxed on his 
land, he may well deplore the well-meant but misdirected 
attempts of the legislature to compel his creditors to share 
his burdens. To this it may be replied that this result 
takes place because the general property tax is not en- 
forced; under this tax all other loans, and not those 
secured by mortgages alone, are taxable. Lenders, there- 
fore, could not discriminate against mortgages. All their 
loans would be taxable at the same rate, no matter how 
secured, even if not secured at all. The lenders, it is 

1 Prof. C. Plehn has shown from the records of savings banks in San 
Francisco that for many years the rate of interest on mortgages ex- 
ceeded that on most other loans by more than the average amount of 
the tax. 



THE DIFFUSION OF TAXES 251 

true, might decline to lend, preferring to nse their capital 
themselves. But if this took place it could be only to 
a limited extent, and while it might tend to raise slightly 
the rate of interest, the rise would not be equal to the tax 
that the lenders would be obliged to pay. 

To this the reply — and the conclusive reply — is that 
the general property tax is not and cannot be enforced. 
It never has been, it is not now, and the evidence already 
presented overwhelmingly proves that there is no prospect 
that it ever will be. Assuming the tax to be enforced so 
far as it applies to mortgages, the result is to bring the 
process of lending and borrowing on the security of land 
into the category of taxed employments, while much of 
other lending and borrowing belongs in the category of 
untaxed employments. The principle stated by Adam 
Smith therefore applies; nobody will lend his money for 
less interest in one case than in the other. And the corol- 
laries of that principle also apply, so that the ultimate 
result of this tax would be to distribute the burden through- 
out the society. We have seen, however, that the assump- 
tion that the tax is enforced in the case of mortgages is 
untenable; only a portion, and a small portion, of such 
loans is actually taxed. As this portion consists largely 
of loans made by trustees under legal compulsion, the tax 
upon it cannot be shifted, and must be borne by those 
helpless and unfortunate persons whose property is man- 
aged under the guardianship of the legislature. The effect 
on the rate of interest of such conditions would probably 
be too small to be traceable; and it is also probable that 
no one maintains that these conditions conform to any 
Standard of justice whatever. 

What is true of the general property tax is true, in the 



252 THE METHODS OF TAXATION 

main, of the income tax. As Mr. E. Cannan has observed, 
the effect of a universal ad valorem tax on all kinds of 
property would not be very different from that of a uni- 
versal income tax. In one case as well as the other, when 
the tax is imposed the taxpayers must either reduce the 
amount that they have been used to spend for goods and 
services by the amount paid to the government, thus les- 
sening demand; or curtail their savings, thus lessening 
the quantity of capital available for production and the 
payment of laborers. It is true that the income tax is, 
to a greater extent than the property tax, degressive ; small 
incomes are, in whole or in part, exempted. To a certain 
extent, therefore, trade carried on on a small scale is 
favored, and were it not for the part taken by corpora- 
tions, the income tax might be raised to such a height 
as to drive large traders out of business. It is possible 
that the increase in the number of corporations may be 
in part due to influences of this nature. The gain of the 
small traders, however, may be rather fictitious than real ; 
the economic loss to the whole society of preventing the 
most productive employment of capital might lessen the 
real gains of the small trader by more than the amount 
of his apparent gains from the remission of his taxes. 
However this may be, sufficient evidence has perhaps 
been presented to show that the income tax is subject 
to the same objections as the property tax, and that the 
inequality of sacrifice that it causes is an irremediable 
injustice. 

This evidence is equally conclusive if the income tax 
is made progressive, although in this case it is not so clear 
that the tax can be shifted from those on whom it is im- 
posed. Were eminent physicians and lawyers compelled 



THE DIFFUSION OF TAXES 253 

to pay large taxes on the incomes that they derive from 
high fees, it seems probable that they would be able to 
obtain still higher fees; for it is to be remembered that 
the increase of their taxes is intended, and may be pre- 
sumed, to lessen the taxes of the rest of the community. 
The community could therefore without inconvenience pay 
higher fees than before, and such fees would probably 
to some extent be exacted. Professional charges, however, 
are regulated by competition much less than the prices 
of goods, and it is impossible to state any very definite 
conclusions on such a matter. To some extent, no doubt, 
the charges of distinguished practitioners are moderated 
by the competition of less known members of their pro- 
fession; but when the issue is life or death, or the title 
to a great property, men are not disposed to haggle over 
the price of the service, or to spend time in trying to 
ascertain where they can procure it most cheaply. Much 
the same is true when the management of a great enter- 
prise is in question; a manager who has the ability to 
make it succeed may be worth a much higher salary than 
he demands. 

But when the income is derived from investments, it 
does not appear how a progressive tax can be shifted. In 
such case no service is rendered for which an increased 
charge can be made, and this is practically the only way 
in which taxation is diffused. Most men of great wealth, 
however, by no means content themselves with the income 
derived from their investments; they are constantly en- 
gaging in new enterprises that promise to increase their 
possessions. The power of concentrated wealth is often 
beyond the control of competition; it may fix its own 
rate of profit. Were these masterful men compelled to 



254 THE METHODS OF TAXATION 

pay very high income taxes, they might in many cases 
exact them from the community ; they might in some cases 
prefer to abandon enterprises which it is for the advan- 
tage of the community to have succeed, but which will 
not be undertaken except with the inducement of great 
prospective gains. But we need not pursue this subject 
further, for as proportionate taxation dependent on self- 
assessment is notoriously evaded, progressive taxation 
would probably be evaded even more, and justice be even 
less attained. 

Taxes ad valorem on commodities, or goods, differ from 
taxes on property only in being collected at irregular in- 
tervals, and therefore at no determinate rates. Such 
taxes may be assessed and collected in several different 
ways. Fees may be charged by the government for license 
or permission to produce certain kinds of goods, or to 
sell them when produced. Licenses to sell certain kinds 
of services, such as those rendered by physicians or law- 
yers, are of the same nature as licenses to deal in goods; 
and the same is true of requirements that compel men 
proposing to engage in such occupations to prepare them- 
selves by studying for a term of years, and to establish 
their competency by passing an examination. They are 
all elements in the cost of rendering the services, they 
must be calculated by those proposing to render them, 
they require the expenditure of capital, and they are 
repaid, in part at least, by the price paid for the services 
by those who buy them. For several reasons, they can- 
not be calculated with the same accuracy as the ele- 
ments in the cost of production or transfer of material 
goods, but the difference is one of degree and not of 
kind. 



THE DIFFUSION OF TAXES 255 

As has been pointed out, licenses to engage in a par- 
ticular employment, unless ad valorem or graduated ac- 
cording to the quantity or value of the goods dealt in, are 
a direct discouragement to men of small means. Some 
attempt is made by the British government to graduate 
license fees, especially in the case of dealers in alcoholic 
drinks; but the attempt is imperfectly successful, and 
seems not to have been imitated in this country. We have 
here, however, very marked gradations according to local- 
ity. License fees vary extremely between different states, 
and between different towns in the same state. They are 
often made very high in cities, with the avowed purpose, 
and with the effect, of driving men of small capital out 
of the liquor business ; it being apparently supposed that 
the sale of strong drink on a large scale is less prejudicial 
to morality than on a small one. The effect of such 
licenses, however, must be, through diminishing the num- 
ber of competitors, to increase the profits of those who 
continue in the business; and there is no reason to be- 
lieve that the different rates imposed in different towns 
cause any other difference in the profits of those who 
carry it on. A liquor-seller, like a grocer, will not engage 
in business in a small town unless he has reason to believe 
that he can make as much money there as in a large city, 
and whether his expenditure be for a license or for the 
rent of his shop, he will sell his goods at such a price as 
will repay him and give him the ordinary rate of profit 
beside. 

Licenses to produce goods. of a certain kind, when the 
government supervises the production, can be graduated 
according to the quantity produced, as is done in the case 
of excise taxes. Such taxes may be regarded as taxes 



256 THE METHODS OF TAXATION 

on sales, or transfers of title. When the excise was es- 
tablished in England, liquors intended for the consump- 
tion of the producer and his family were exempted, or 
taxed at a lower rate, and some such exemption still exists. 
But it is impossible to prevent goods so produced from 
passing into consumption, and the quantity of such goods 
is very small compared with the quantity produced for 
sale. Some such exemption takes place in France, as in 
the case of the production of what is known as cru; and 
in this country wine and cider are taxed lightly, if at all. 
In both cases, political considerations are influential. On 
the whole it seems that no serious error can result if we 
class taxes on the production of goods with taxes on trans- 
fers of title. Such taxes are usually imposed on what 
are called raw materials, or goods in one of the early 
stages of manufacture; although, in the case of the ex- 
cise, they may be repeated at several stages. In this 
country they are commonly repeated also by the state 
governments, and every drinking place displays two li- 
censes. By whomsoever they are advanced, it seems to 
be universally understood that they are finally paid by 
the consumer. In so far as they compel the use of large 
capitals, they tend to limit competition and to increase 
the rate of profit. 

These conclusions are confirmed by some remarkable 
episodes in our fiscal history. During the Civil War, dis- 
tilled spirits were for the first time for many years sub- 
jected to taxation by the general government. The tax 
first imposed was 20 cents a gallon. It did not apply 
to spirits already produced, and the owners of these spirits 
promptly advanced the price, thus securing a very large 
sum in profits. This experience was so satisfactory that 



THE DIFFUSION OF TAXES 257 

those engaged in the trade welcomed and even labored to 
obtain additional taxes, amounting in March, 1864, to 
60 cents a gallon, in July of the same year to $1.50 a 
gallon, and in January, 1865, to $2 a gallon. Evidence 
taken before the Revenue Commission in 1865-66 showed 
that there was in January, 1864, a stock of spirits on 
which the tax had been paid, large enough to supply the 
country for half a year, and that on this stock profits of 
from 60 cents to $1.40 a gallon were obtained. It seems 
clear from this instance that the imposition of a tax may 
be highly advantageous to those engaged in an industry, 
a result which can follow only if they are able to shift 
the tax to the consumers of their products. 

Another instance mentioned by Mr. D. A. Wells, is 
even more conclusive on this point, although here those 
engaged in the taxed employment struggled only to retain 
the tax, not to increase it. A tax on matches was imposed, 
in 1864, at the rate of one cent per package of one hun- 
dred or less, yielding at one time a revenue of over 
$3,500,000 a year. This sum the manufacturers were 
required to advance by purchasing and affixing on every 
package a stamp before sale was permitted. To manu- 
facturers furnishing their own design for the stamp, a 
discount of ten per cent was granted on purchases amount- 
ing to $500, and sixty days' credit was also allowed to 
those offering government bonds as security for their pay- 
ments. These conditions were too onerous for manufac- 
turers on a small scale, and the business fell into the hands 
of a few concerns, which raised the retail price of matches 
considerably more than the amount of the tax. When 
it was proposed, in 1883, to abolish the tax, these manu- 
facturers struggled vigorously to prevent it. They did 

17 



258 THE METHODS OF TAXATION 

not succeed, and the retail price fell from fifteen cents 
for six packages to six cents. 1 

These premises seem to authorize the conclusion that 
a tax on the sale of anything is, as a general rule, followed 
by an increase in the price for which the thing is sold; 
but whether this increase in price will be equal to, or 
be greater or less than, the tax, is not so clear. For 
reasons that have been stated, a tax on all sales would 
diminish general profits; were the tax adjusted by om- 
niscience, every employment would be equally burdened, 
and nothing would be gained by changing from one taxed 
employment to another. No such adjustment, however, 
is within the capacity of any legislature, and while in a 
few cases a universal tax on sales has been enacted, it 
has been enforced — so far as it was enforced at all — 
with most disastrous results. The Alcavala of Spain was 
a tax of this kind, being levied on the sale of every sort 
of property, and repeated every time the property was 
sold; and the decline of that country has been, it is sup- 
posed, largely due to the ruinous effects of this tax. When 
taxes are imposed on the sale of certain things consumed 
in large quantities, the investment of capital in the pro- 
duction of those things tends to be checked, and its over- 
flow into other channels would tend to decrease the re- 
turns from those channels, and thus cause a general 
distribution of the burden. To a certain extent, therefore, 
the producers of the taxed articles might be prevented 
from raising the price for which they are sold by the 
whole amount of the tax. 



1 The repeated increases of the beer duty in England have been fol- 
lowed by very marked decreases in the number of brewers. Their num- 
ber is scarcely one-half what it was a few years since. 



THE DIFFUSION OF TAXES 259 

On this subject Adam Smith and other writers of his 
time made some statements that seem to have been re- 
garded by most subsequent writers as axiomatic, and that 
are constantly repeated at the present day. They are, 
nevertheless, not free from error, and should be consid- 
ered in the light of the criticism of Ricardo. It was 
asserted by Adam Smith that taxes on wages, or on the 
necessaries of life consumed by laborers, would cause 
wages to rise, and that the increase of wages would be 
recovered by the employer, " who would be entitled and 
obliged to charge it with a profit upon the price of his 
goods." Upon this Ricardo observes that as according 
to Adam Smith's supposition corn, would not be raised 
in price, while manufactured goods would be, manufac- 
turers would be benefited and not injured by such a tax. 
He demonstrated that the tax would fall on the profits of 
stock, for manufacturers could not increase the price of 
their goods. This is in harmony with his general doc- 
trine that " profits are the leavings of wages " ; and he 
expressed the opinion that except in the immediate effects 
it made little difference whether the profits of stock or 
the wages of labor were taxed. He applied the same 
criticism to the assertion that such taxes were repeated 
and accumulated four or fi.ve times. According to Adam 
Smith: 

" In the price of leather . . . you must pay, not only for the 
tax upon the leather of your own shoes, but for a part of that 
upon those of the shoemaker and the tanner. You must pay, 
too, for the tax upon the salt, upon the soap, and upon the 
candles, which those workmen consume while employed in 
your service, and for the tax upon the leather which the salt- 
maker, the soap-maker, and the candle-maker consume, while 
engaged in their service." 



260 THE METHODS OF TAXATION 

To this Ricardo replies that as neither of these per- 
sons will be benefited by the tax on leather, etc., and as 
the government will receive no more than the tax imposed, 
it is impossible to conceive that more can be paid by the 
public upon whomsoever the tax may fall. He further 
illustrates his position by his comment on M. Say's as- 
sertion that as when Turgot reduced the market dues on 
fish sold in Paris by one-half without reducing the reve- 
nue from those dues, the consumption of fish must have 
doubled, and the profits of fishermen and those engaged 
in the trade must have doubled, thereby increasing the 
income of the country by the whole amount of these in- 
creased profits. Of this Ricardo says, these profits could 
have doubled only as the result of withdrawing capital 
and labor from other trades, where they were already 
profitably employed. The real gain to accumulation was 
measured " by the difference between the profits obtained 
in the business in which the capital was newly engaged, 
and those obtained in that from which it was withdrawn." 

An error of more importance is that of some modern 
writers who have maintained that when a tax was im- 
posed on raw materials, the tax was increased to a very 
great extent by the repeated profits made on it by dealers. 
It is no doubt true, as M. Say stated, and as Ricardo 
admitted, that the dealers and manfacturers through whose 
hands the material may successively pass, must employ 
greater funds in having to advance the tax, which may 
often be difficult for a person of very limited capital and 
credit. But Ricardo did not admit that the profits on 
the tax advanced must also be charged to the consumer, 
and that this additional tax is one from which the treasury 
derives no advantage. The error arises from disregarding 



THE DIFFUSION OF TAXES 261 

the fact that when we speak of a rate of interest we mean 
the interest for a year, whereas profits are calculated on 
the capital employed in a transaction, even if it is com- 
pleted in a month or a day. It is impossible to explain 
the matter more briefly or more lucidly than Ricardo has 
done in the following passage: 

" M. Simonde, in his excellent work, De La Richesse Com- 
merciale, following the same line of argument as M. Say, has 
calculated that a tax of 4,000 francs, paid originally by a 
manufacturer, whose profits were at the moderate rate of 
10 per cent, would, if the commodity manufactured only 
passed through the hands of five different persons, be raised 
to the consumer to the sum of 6,734 francs. This calculation 
proceeds on the supposition, that he who first advanced the 
tax would receive from the next manufacturer 4,400 francs, 
and he again from the next, 4,840 francs ; so that at each step 
10 per cent on its value would be added to it. This is to sup- 
pose that the value of the tax would be accumulating at com- 
pound interest; not at the rate of 10 per cent per annum, 
but at an absolute rate of 10 per cent at every step of its 
progress. This opinion of M. Simonde would be correct, if 
five years elapsed between the first advance of the tax and 
the sale of the taxed commodity to the consumer; but if one 
year only elapsed, a remuneration of 400 francs, instead of 
2,734, would give a profit at the rate of 10 per cent per an- 
num to all who had contributed to the advance of the tax, 
whether the commodity had passed through the hands of five 
manufacturers or fifty." 

Most things, perhaps, are consumed within a year from 
the time when they began to be prepared for consump- 
tion; but many substances become instruments of pro- 
duction, and may last a long time before they are worn 
out. Certain things are not fit to be used until ripened 
by time; some must undergo many processes before they 



262 THE METHODS OF TAXATION 

reach the final stage. In such cases some governments 
endeavor to confine their taxation to this final stage, and 
the permission to store goods in warehouses under gov- 
ernmental control which is now usually extended, is in 
furtherance of this purpose. Spirits intended to be drunk 
should lie for four years before use, during which time 
there is great loss from evaporation. To exact the duty 
on them as soon as they were produced, would not only 
burden the consumer with the accumulated interest on 
the tax on what he consumed but would tax him on what 
had never reached him. The cost of producing a gallon 
of whiskey is perhaps not over twenty cents, and the tax 
is more than five times that sum. One-fifth of a gallon, 
the ordinary contents of a " quart " bottle, may be sold 
for a dollar or more. When the price of anything is ad- 
vanced to such an enormous extent, it is certainly reason- 
able to postpone the collection of the tax until the goods 
are withdrawn from storage, and to collect it only on the 
amount actually withdrawn. It seems to be universally 
admitted that the consumers pay this heavy taxation; 
but some part of it may be shifted back on the producers 
of the grain used by distillers, as the demand for their 
products cannot be so great as it would be were there 
no tax on spirits. 

From the foregoing considerations it would seem that 
taxes are diffused according to the general law that profits, 
including under the term all returns to labor and capital, 
tend to be equalized. This law, however, implies not 
only freedom of competition but also an unlimited supply 
of materials at a constant price. It assumes that manu- 
factured goods, for example, can be produced in greater 
or less quantities with proportionate cost. But this is 



THE DIFFUSION OF TAXES 263 

not true of land. Its quantity can only with great dif- 
ficulty be increased; and, in the great centers of trade 
it is very sharply limited. What is of especial importance, 
different pieces of land have very different advantages, 
whether of fertility or situation; from which arises the 
phenomenon of rent. Rent is the price paid for the use 
of land from which more than ordinary profit can be 
derived. So wise a man as Adam Smith, influenced by 
the Physiocrats, held that there was no land that did not 
yield some rent, but Ricardo declared that much land in 
cultivation produced only enough to give the ordinary 
return to capital, and that nobody could afford to pay 
rent for it. Those who wish to cultivate better lands 
must pay a rent equal to the excess of their product over 
that of the inferior lands. They can make more by the 
use of such lands, and they can afford to pay more. 

If a tax is levied on ground rent, it seems to be uni- 
versally admitted, the landlords alone pay it. The tax 
is not paid by those using the lowest grade of land, as it 
bears no rent ; and if those using the higher qualities paid 
it, they would be making less profit than those who paid 
no rent. It is true that the landlords cannot accumulate 
so much, or spend so much, as before, and to a slight 
extent the tax may be thus diffused. The extent would 
be so slight as to be negligible; and on the assumption 
that landlords are charging all the rent that their land 
will bear, it seems clear that any additional burden on 
the land cannot be shifted from them. Of course, where 
rents are rapidly rising, they may not be positively re- 
duced by taxation, but they will be relatively reduced. 
They may continue to rise, but not to the height to which 
they would have risen. It would seem then that rent 



264 THE METHODS OF TAXATION 

is a peculiarly fit subject for taxation according to the 
progressive method. As Adam Smith observed, it is " a 
species of revenue which the owner, in many cases, en- 
joys without any care or attention of his own. Though 
a part of this revenue should be taken from him in order 
to defray the expenses of the State, no discouragement 
will thereby be given to any sort of industry. The annual 
produce of the land and labor of the society, the real 
wealth and revenue of the great body of the people, might 
be the same after such a tax as before. Ground rents 
and the ordinary rent of land are, therefore, perhaps, the 
species of revenue, which can best bear to have a peculiar 
tax imposed upon them." The obstacles in the way of 
applying such a tax, however, are very serious. They 
have been considered at length in a preceding chapter, 
and it is only necessary to refer to the enormously wide 
diffusion of the ownership of land, either directly, or 
by mortgage or other charge ; to the impossibility of sepa- 
rating the value of land due to the expenditure of the 
owners from its value due to other causes; and to the 
vast extent of the " unearned increment " in other prop- 
erty as well as land. 

House rent may be divided into two parts : the ground 
rent, and the building rent. The latter is regulated by the 
same principles that regulate the gains made in any em- 
ployment. If houses cannot be rented for enough to make 
it profitable to build them, they will not be built. The 
builder will consider what the taxes will be on the com- 
pleted house, just as he considers what he will have to pay 
for materials and labor, and if the whole expense is likely 
to be so great as to leave him less profit than he can make in 
some other business, he will not engage in building. Pro- 



THE DIFFUSION OF TAXES 265 

vided he can obtain a sufficient rent, it makes no difference 
to him whether taxes are high or low, or whether materials 
and labor are high or low. But the ability of the tenant 
to pay rent is limited, and he may be affected by a tax on 
rent as he is affected by a tax on any necessary of con- 
sumption. If a tax on houses is imposed, that part which 
falls on the ground rent, it seems to be admitted, will be 
paid by the landlords; but that part which falls on the 
building rent might be partly paid by the tenant. Were 
there no compressibility in human beings, the tenants 
might indeed pay the whole tax. Men must have shelter, 
and if all existing shelter is taken, there seems nothing to 
do but to pay more rent, if more is demanded. In fact, 
however, population is very compressible, and there are 
always some vacant tenements. Some men would prefer 
to live in smaller houses, or in lodgings, rather than pay 
more rent; and, taken as a whole, the population might 
be accommodated in cheaper quarters. But rather than 
have the better class of houses vacant the landlords would 
lower their rent, and the same might take place down to 
the lowest class of tenement. In a decaying town, all taxes, 
it might be said, must fall on the landlords; but in an 
improving town they may be able to recover them at once 
out of the increasing value of their land and the greater 
rents that they are constantly enabled to charge. But the 
principle is unaffected that whatever discourages building 
in any place tends to lessen the demand for unused land, 
and this decrease in the value of land decreases also the 
discouragement to investment. 

As has been observed, the fact that taxes are higher in 
one town than in another makes no difference with the 
profits of builders; there will always be some building 



266 THE METHODS OF TAXATION 

to be done, the most profitable jobs will be taken first, and 
the least profitable ones must yield the marginal return, 
which would be substantially the same in both towns. But 
a difference in the rate of taxation may cause a redistribu- 
tion of capital that cannot be affected without some loss to 
the whole society; the differential tax is subtracted from 
the price of the differential advantage of situation for 
which the tenant pays, but there may be some loss from 
friction in the process. Allowing for friction, it would 
seem to be true that a general tax on real estate would have 
about the same effect on the distribution of wealth as a tax 
on all forms of property. The owners of personal property 
would for a time get some profit from exemption; but if 
capital were driven out of the building trades the effect 
would be to diminish the rate of profit in the industries 
into which it made its way. Were it possible to tax per- 
sonal property effectively, landlords would have to bear 
a part of the burden, on the principle that if less can be 
made by the use of land less will be paid for it; but the 
nature of personal property is such that no general tax on 
it can be collected. 

In treating of taxes on expense it was observed that 
taxes on house rent required more particular consideration 
than could then be advantageously given them. On this 
subject the sagacious comments of Adam Smith remain 
unchallenged; they are as true now as when they were 
made, and there is as little to add to them as to take away 
from them. They are substantially as follows: 

" The rent of houses, though it in some respects resembles 
the rent of land, is in one respect essentially different from it. 
The rent of land is paid for the use of a productive subject. 
The land which pays it produces it. The rent of houses is 



THE DIFFUSION OF TAXES 267 

paid for the use of an unproductive subject. Neither the house 
nor the ground which it stands upon produce anything. The 
person who pays the rent, therefore, must draw it from some 
other source of revenue, distinct from and independent of this 
subject. A tax upon the rent of houses, so far as it falls upon 
the inhabitants, must be drawn from the same source as the 
rent itself, and must be paid from the revenue, whether de- 
rived from the wages of labor, the profits of stock, or the rent 
of land. So far as it falls upon the inhabitants, it is one of 
those taxes which fall, not upon one only, but indifferently 
upon all the three different sources of revenue; and it is in 
every respect of the same nature as a tax upon any other sort 
of consumable commodities. In general there is not, perhaps, 
any one article of expense or consumption by which the lib- 
erality or narrowness of a man's whole expense can be better 
judged of, than by his house rent. . . . The proportion of the 
expense of house rent to the whole expense of living is differ- 
ent in the different degrees of fortune. It is perhaps highest in 
the highest degree, and it diminishes gradually through the 
inferior degrees, so as in general to be lowest in the lowest 
degree. The necessaries of life occasion the great expense of 
the poor. They find it difficult to get food, and the greater part 
of their little revenue is spent in getting it. The luxuries and 
vanities of life occasion the principal expense of the rich ; and 
a magnificent house embellishes and sets off to the best ad- 
vantage all the other luxuries and vanities which they possess. 
A tax upon house rents, therefore, would in general fall heavi- 
est upon the rich; and in this sort of inequality there would 
not, perhaps, be anything very unreasonable. It is not very 
unreasonable that the rich should contribute to the public 
expense, not only in proportion to their revenue, but some- 
thing more than in that proportion." Wealth of Nations, 
Book V, Chap. XI, Part II, Art. I. 1 

1 Later writers have concurred in this judgment. John Mill ob- 
serves: "No part of a person's expenditure is a better criterion of his 
means, or bears on the whole more nearly the same proportion to them. 
A house tax is a nearer approach to a fair income tax than a direct assess- 
ment on income can easily be : having the great advantage that it makes 



268 THE METHODS OF TAXATION 

A tax of this description, it would seem, cannot be 
shifted to any great extent. If the occupants of very costly 
houses owned them, they would pay the tax on the ground 
rent as landlords, and on the houses as consumers. When 
they do not own them, they may perhaps in many cases 
insist that the landlord should pay a part of the tax, if 
not all of it; and, rather than have the house vacant, the 
landlord might yield to the demand. He is presumed to 
exact the highest possible rent, and the tenant may decline 
to bear any additional charge. But as houses of this de- 
scription are exceptionally costly, the ground rent is often 
a small part of the gross rent when compared with that of 
the building. The house is intended to be luxurious, and 
to impress the world with its magnificence; often, it may 
be thought, to cause astonishment at its lavish extrava- 
gance. A tax on the rent of such a house is in some 
respects like a tax on any other expensive luxury ; it may 
tend to decrease the demand for the luxury by reducing 
the number of those who are able or willing to afford it. 
It would probably do so in times of financial distress ; but 
with the return of prosperity the demand would revive. 
The case is peculiar in that the motive is ostentation ; men 
wish to display their opulence. They cannot well display 
it in any other way, for the " luxuries and vanities " that 
they possess would make them ridiculous if placed in a 
mean abode. He who lives in such an abode is apt to be 

spontaneously all the allowances which it is so difficult to make, and so 
impracticable to make exactly, in assessing an income tax; for, if what 
a person pays in house rent is a test of anything, it is a test not of what 
he possesses, but of what he thinks he can afford to spend." Prof. A. 
Marshall asserts that those who live in expensive houses are just those 
who now pay less than their fair share to the expense of the country ; 
they might be made to pay very high rates on their houses. He sug- 
gests a progressive rate, rising from 4s. in the pound to 10s. 



THE DIFFUSION OF TAXES 269 

thought unable to afford a better one; he cannot expect 
fashionable people to visit him, and the women of his 
family will be discontented with their position. If he is 
known to be rich, he will be despised for being penurious, 
and he can derive but a miserly enjoyment from his riches. 
The payment of a high tax upon an expensive house thus 
becomes an additional sign of great wealth, and the desire 
to display wealth is too strong to be overcome by the reflec- 
tion that it will cost much money to display it. 1 

It is no objection to such a tax that, like a tax on any 
other luxury, it can be evaded by self-denial. Rather than 
pay it, some men will choose to inhabit cheap houses in 
unfashionable quarters, and to be looked down upon as 
either poor or penurious. Persons of this unpopular class, 
however, are precisely those whom it is not advantageous 
for the community to tax. Their savings maintain that 
great fund of capital which is the life-blood of modern 
industry. What is taken from those whose vanity leads 
them to build luxurious houses, is taken from a fund which, 
so far as producing wealth is concerned, would be wasted 
in extravagant living. What is taken from the parsi- 
monious is taken from a fund which employs productive 
labor, and adds to the wealth of the community. It is com- 
mon to condemn ostentatious luxury, and it is equally com- 
mon to sneer at those who abstain from such luxury when 
they can afford to indulge in it; but, if it is an evil, to 
relinquish it is commendable, and whatever revenue from 
taxes on such luxury the government might lose by absten- 
tion, would be more than made up for by the increase of 

1 When the income tax was levied in this country, the returns being 
published, it was said that many persons gave in their incomes as much 
larger than they really were. They were willing to pay a premium for 
the distinction of being reputed wealthy. 



270 THE METHODS OF TAXATION 

that fund from which its chief revenue must be derived, 
to say nothing of the gain in moral welfare from more 
modest living. 

A universal tax on house rent would conform more 
nearly, perhaps, to the requirements of the proportionate 
method than any other tax that can be devised. Like all 
these taxes, however, it would be unequal because of the 
unequal needs of different individuals. A physician in 
good practice, for example, must ordinarily live in a good 
neighborhood; his patients demand prompt attendance, 
and he must live where they can easily find him. What 
with other men is ostentation may be with him a necessity ; 
and as his expense for house rent seems unavoidably 
greater than that of other men having equal incomes, a tax 
upon it would be exceptionally onerous. Even in this 
case the tax might after a time be shifted by means of in- 
creased fees ; but the proportionate method, as exemplified 
in practice, ignores the diffusion of taxes. A more serious 
inequality arises from variations in age, in health, and in 
the size of families. An unmarried man needs incur no 
great expense for house rent, and a tax on this expense 
might cause him no inconvenience. But a man who has 
given hostages to fortune is in a very different condition, 
which he could not improve by shifting the tax. Like 
the English tax on windows, such a tax might thus seri- 
ously affect the health of the community, and operate to 
discourage marriage. Even here, therefore, the propor- 
tionate method seems not to conform much better to the 
demands of justice than in the other instances in which it 
has been applied. 

These difficulties do not occur, or are less serious, if the 
tax on house rents is made progressive, and it is remark- 



THE DIFFUSION OF TAXES 271 

able that the advocates of the progressive method have paid 
so little attention to this tax. Adam Smith expressed sur- 
prise that it had been so seldom applied, and there has 
been little change since he wrote. The British govern- 
ment, it is true, levies a tax on inhabited houses that is 
moderately progressive. Houses renting for less than £20 
are exempted, those renting at a higher rate up to £40 are 
taxed 2d. and 3d. in the pound, those from £40 to £60 are 
taxed 4d., and all above £60 are taxed 6d. in the pound. 
Like the income tax, this duty is rather degressive than 
progressive, and certainly falls with no peculiar weight 
on the very rich. It is, however, the only tax, the death 
taxes to a certain degree excepted, by which the progressive 
method can be applied without evident injustice. It is 
free from the objections to self -assessment, it involves little 
vexation or inquisition, it can be graduated so as to cause 
no suffering to persons of moderate wealth, it can be col- 
lected with little cost, and it is paid by those who choose 
rather to pay it than to diminish their ostentatious expend- 
iture. It has all the advantages in fact which the income 
tax has only in theory, and avoids most of the injustice 
which that tax, as actually levied, occasions. Such in- 
equality as it may create can be reduced to a minimum 
by judicious exemptions; and some inequality, it must 
be remembered, is inseparable from human life, and from 
all taxation. With proper graduation, this tax would 
seem more than any other to afford that equality of oppor- 
tunity which justice is thought to demand; for, while it 
furnishes revenue to the government, it obtains much of 
it from the profusion of the extravagant, and at the same 
time enables the parsimony of the frugal to accumulate 
the wealth on which the prosperity of the society depends. 



272 THE METHODS OF TAXATION 

The taxation of monopolies might properly be consid- 
ered here, as it must of course be affected by the causes 
that operate to diffuse taxation. That subject, however, 
has become much confused in the course of recent discus- 
sion; and, before it can be disposed of, some popular 
opinions will require examination. It is enough here to 
point out the distinction between monopolists and monopo- 
lies. A monopoly may be the property of a great many 
people, none of whom has any large share of it. In such a 
case there could be no application of the progressive the- 
ory; and without making taxation disproportionate, no 
additional tax perhaps could be laid on the monopoly. 
Both the proportional and the progressive methods have 
reference to the property of individual men; but unless 
a monopoly is owned by a single man, or by a few men in 
equal shares, a tax upon it would affect individuals very 
unequally. For this, and some other reasons, it seems de- 
sirable to consider taxation of this sort in connection with 
the economic method. 

A review of the facts and principles above set forth 
seems to justify the conclusion that taxes, as a rule, are 
not peculiarly burdensome to those who actually pay them 
to the government ; even when the intent of the legislature 
is clear that they shall fall on certain persons, they often 
fall elsewhere. Had it not been demonstrated that the 
attempts made in this country to apply the proportionate 
method had completely failed of their design, the prin- 
ciples governing the diffusion of taxes would show that 
such attempts would in any event fail. The forces operat- 
ing to bring about the existing distribution of wealth seem 
too powerful to be overcome by legislation; partly, it is 
proper to observe, because much of our legislation is of a 



THE DIFFUSION OF TAXES 273 

kind to maintain the present distribution, while some of 
it is even designed to create or increase those inequalities 
which excite legislative attempts at their removal. To a 
certain extent this conclusion must be modified in speak- 
ing of the progressive method ; there are taxes that can be 
made to reduce the wealth or income of designated indi- 
viduals. We have had few progressive taxes hitherto in 
this country, and such experience as we have had with 
them is of little value. The present English system per- 
haps carries the method as far as is prudent ; two-thirds of 
the income of the English people is exempted from income 
tax, and the death duties are chiefly paid by the larger 
estates. But the equalization of wealth which is aimed 
at by this system, it can hardly be doubted, is to some 
extent defeated by the shifting of the taxes. It is even 
probable that it is defeated to a large extent; for, to the 
astonishment of some of those most competent to judge 
of such matters, there are signs that the former rate of 
increase in the number and in the size of large estates tends 
still to continue. 1 

In view of the injustice that seems to be inseparable 
from the existing attempts to apply either the proportion- 
ate or the progressive method, as well as of the uncertainty 
in the results of those attempts due to the diffusion of 

1 The products both of Sir W. Harcourt's death duties and of the 
increased income tax have been greater than was anticipated. In fact, 
every penny added to the income tax has brought in a proportional in- 
crease in revenue. But it is to be noted that during this period of high 
taxation the increase in the wealth of the world has been very great, 
general prices have risen perhaps 25 per cent, and the rate of interest 
has been for a part of the time very high. Measured in money, the in- 
come of the country may have increased more rapidly than the tax: 
and as the tax is paid in money, it is a smaller part of the true wealth of 
the country than it appears to be. Recent prices of consols have been 
such as to give a greater net return than when the tax was lower. 

18 



274 THE METHODS OF TAXATION 

taxes, it seems not unreasonable to conclude that justice 
cannot be attained through measures depending for their 
equal application on the ascertainment of the property or 
income of the individual taxpayer. Such knowledge is in 
his possession alone, and not always even in his; and to 
found a system of taxation on the supposition that he will, 
or can be made to, disclose it, demoralizes society by mak- 
ing fraud and corruption pecuniarily advantageous. It 
makes dishonesty the best policy. We may, therefore, 
proceed to inquire whether the requirements of justice 
will not be better complied with by what we have denomi- 
nated the economic method. 



CHAPTER IX 

THE ECONOMIC METHOD 

The proportionate method, as above set forth, aims to 
adjust the burden of taxation according to the possessions 
of the individual, and in practice this implies that the 
amount of the possessions, or revenue, of every individual 
must be known ; an impossible condition. The progressive 
method escapes this difficulty by dividing all men into two 
classes, the rich and the poor, and placing the burden on 
the rich. But to classify is to ignore differences in the 
condition of the individual members of the class, and since 
submission to burdens means suffering or sacrifice by in- 
dividual sentient beings, to ignore the differences in their 
condition is evidently unjust. Moreover in practice the 
progressive method to some extent resorts to self -assess- 
ment, a process that inevitably leads to injustice of an 
especially pernicious sort. Some of the measures of the 
progressive method, it is true, are free from this objec- 
tion; and by judicious graduation individual sacrifices 
may be made tolerably equal. But these measures do 
not produce sufficient revenue, and they are supplemented 
by taxes that may not only be unjust, but may even neu- 
tralize the effect of the progressive taxes. The great aim 
of the progressive method is not so much to diminish the 
wealth of the rich as to increase that of the poor; to give 
the poor more opportunity to become rich. Progressive 
taxes, it is maintained, will do this. But this is not es- 
tablished by experience, for the limits of the diffusion 



276 THE METHODS OF TAXATION 

of taxes are not known; and, moreover, it is conceivable 
that the same end may be attained with other means. As 
was explained at the outset, the economic method may in 
practice bring about the results aimed at by the other two. 
The predominant aim of the economic method is to 
procure the revenue of the government with the least 
possible diminution of the revenue of its subjects. But 
this does not mean that the recognized principles of jus- 
tice are to be disregarded; on the contrary, it is itself a 
principle of justice. Taxes are by nature burdensome, 
and nobody will deny that it is unjust to make the burden 
heavier than needs be. ISTor are the other principles of 
justice that we have found to be implicitly or explicitly 
accepted by men in general less controlling. Nothing can 
excuse the legislature for resorting to the morally dis- 
astrous practice of demanding disclosure by the taxpayer, 
or for employing spies and informers. No measure, how- 
ever productive of revenue, conforms to the economic 
method, if it disappoints the expectations which the gov- 
ernment has caused its subjects to form with reference 
to the future conditions of industry and tenure of prop- 
erty. Nor, whether the progressive method holds up the 
true ideal of justice or not, can any measure be tolerated 
that clearly diminishes such opportunity to obtain wealth 
as is now open to the poor. It is perhaps not easily con- 
ceivable that such a measure should be even in theory 
economically advantageous; but were it so, a prevalent 
feeling that it was unjust would make it impracticable. 
This indeed illustrates a general principle. The loss from 
friction in applying any measure of taxation condemned 
by public opinion as unjust is apt to make it relatively 
unproductive of revenue. 



THE ECONOMIC METHOD 277 

The fact that a particular tax violates no rule of justice 
and is economically collected does not by itself prove that 
such a tax should be adopted. For we have to consider 
taxation as a whole, and particular taxes as parts of that 
whole. Hence the relations of taxes must be examined; 
one tax may, as it were, neutralize the effect of another, 
or enlarge and intensify those effects. We cannot, in 
a federal state like our own, expect to attain justice when 
no harmony exists between the system of taxation em- 
ployed by the general government, and that of the states, 
especially when the systems of the states differ among 
themselves. One state might develop a system admirable 
in its design, and that might be satisfactory in its results 
were the state isolated, but which, owing to the different 
policy of its neighbors, might ruin some of its own indus- 
tries or drive them from its borders. What is known as 
the protective system of customs duties operates in favor 
of certain manufacturers on a very large scale, and the 
states where those manufacturers carry on their trades 
may so adapt their taxes as to add to these favors. An 
attempt by an adjoining state to diminish these favors 
by its system of taxes could hardly fail to expel these trades, 
and concentrate them to an even greater degree. It seems, 
therefore, that the economic method can be put in practice 
only on the condition that substantial harmony prevails 
among the systems of the states and that of the general 
government ; or at least that lack of harmony may seriously 
impair the results that it is proposed to attain. 

Subject to this condition, and to the rules of justice, the 
economic method seems to prescribe the employment of 
only such taxes as shall interfere with industry to the 
least possible extent, and — which is much the same thing 



278 THE METHODS OF TAXATION 

— be collected with the least possible expense; vexation, 
as Adam Smith says, being, if not strictly speaking ex- 
pense, certainly equivalent to the expense at which every 
man would be willing to redeem himself from it. " The 
distinguishing feature of the best tax," said J. R. Mac- 
Culloch, " is not that it is most nearly proportioned to 
the means of individuals, but that it is most easily as- 
sessed and collected, and is, at the same time, most con- 
ducive to the public interests." Nobody pretends that it 
is possible to apportion equitably the benefits of govern- 
ment, and it seems equally hopeless to distribute its bur- 
dens with any approximation to justice. Nothing can 
be more certain, however, than that justice is not offended 
by doing away with useless expense and vexation, and the 
extent to which this can be done may perhaps appear 
to be so great as to make it highly inequitable not to do 
it. What Adam Smith said on this subject is too well 
known to be quoted, and later writers have done little 
more than repeat his statements. Some recent observa- 
tions by Prof. A. Marshall, on the futility of legislative 
attempts to equalize the sacrifices of individual taxpayers, 
are, however, so judicious as to deserve mention. They 
are as follows: 

" No near approach to equity in taxation is attainable. . . . 
Even in the interests of equity, canons based on mere con- 
siderations of equity are often of but secondary importance 
in practice. Speaking generally, those systems of finance 
have caused the least injustice and hardship which have most 
favored the development of the energies and inventiveness of 
the people; which have hindered them the least in the selec- 
tion of those routes for the satisfaction of their wants; which, 
partly in pursuance of this end, have given a preference to 
taxes which were productive and elastic in proportion to the 
army of officials needed to levy them; which have avoided 



THE ECONOMIC METHOD 279 

vexatious meddling, and which have been most definite and 
certain, and free from surprises and from opportunities of 
corruption." 

The field of inquiry is thus considerably narrowed; 
and much of it has been already traversed. The objec- 
tions to the general property tax may be regarded as con- 
clusive, and it will be dismissed from consideration. The 
income tax proper — for much of the taxation under this 
head is miscalled — as it must be assessed by those who 
pay it, is to be rejected, although something remains to 
be said of the practice of " taxing income at its source." 
The death taxes, as they are usually assessed by those who 
do not pay them, or under conditions that make under- 
assessment difficult, are comparatively free from injusr 
tice of the worst kind, and may deserve a place in an 
economic system of taxation. They have been discussed 
at length and there is little more to be said of them at 
present. They are in this country an experiment, and 
w T e cannot yet determine their effects. Nor, as the very 
high rates in other countries are comparatively recent, 
can we reason from their analogy. Taxes on expense, on 
transfers of title to goods, stamp taxes, licenses, taxes on 
occupations and on corporations, all require to be exam- 
ined with reference to the cost of collection and the ob- 
struction of industry, as well as to the principles of the 
diffusion of taxation. Particular attention must be given 
to the taxation of land and other monopolies; and since 
the amount and value of property to be taxed are not 
properly fixed by the owners, the office of assessor and 
the function of assessment acquire an importance much 
greater than has hitherto been assigned to them, and de- 
mand exceptional consideration. 



280 THE METHODS OF TAXATION 

As a general rule, a tax that produces little revenue, 
even if otherwise satisfactory, is not expedient. The ex- 
pense of collecting a tax seldom increases at the same rate 
as the amount collected. A certain number of officers will 
in any case be required, and a certain number of offices 
must be kept open. The amount collected at these offices 
may not be enough to pay for their rent, yet it might 
cause those who pay their taxes there much inconvenience 
were they compelled to go to more distant places. Nor is 
it easy for the government to close an office once estab- 
lished, or to discharge superfluous employees. There are 
not a few custom-houses in this country where the duties 
collected do not pay the cost of collecting them; but, al- 
though these conditions are of long standing, the attempts 
that have been from time to time made to abolish these 
offices have proved unsuccessful. Even when very few 
persons are liable to pay a tax, it may cost as much to 
collect it as when there are a great many, for in order to 
be sure that the tax is paid by the few who owe it, it 
may be necessary to examine a great many who do not. 
Much the same is true of a tax on a commodity that is 
little used. Special machinery may have to be contrived 
for its collection, and a vast amount of inspection may be 
necessary to prevent a small amount of evasion. 

Taxes of this kind, as well as others, are usually levied 
by means of licenses, or of stamps affixed to merchandise 
or to documents. The number of license taxes in this 
country is not very great, and many of them may be 
regarded rather as measures of police than of taxation. 
There may be sufficient reasons why the exercise of cer- 
tain professions or occupations should be subject to regu- 
lation. Some governmental certificate of competency or 



THE ECONOMIC METHOD 281 

character may be thought necessary to protect the public 
against imposition ; and, if licenses have that effect, they 
may be justified, and a fee sufficient to pay the expense 
of examination and registration may be proper enough. 
Fees of greater amount are obviously taxes, and as ex- 
plained above, by increasing the cost of services they tend 
to fall on the whole society. The English government 
imposes many licenses of this kind, some of which are 
graduated and some are not. When not graduated, such 
taxes are obviously unequal. They are a heavier burden 
on the practitioner or the dealer in a small way, than on 
those whose income is larger, and their effect must be 
to diminish that opportunity to prosper which men of 
small resources seem justly to demand. Perhaps the only 
licenses in this country that deserve consideration as taxes 
are those issued to dealers in alcoholic drinks and tobacco. 
In England such taxes are graduated with a good deal of 
care, either according to the rent of the premises where 
these drinks are sold ; or, in the case of tobacco, according 
to the quantity dealt in. In this country, although the 
rates vary greatly in different places, there is for the most 
part little attempt at graduation. In general it seems to 
be thought just to drive small dealers out of the trade, 
and to confine it to those who have large capitals. But the 
sudden imposition of high rates has in not a few cases 
ruined the proprietors of small but decent eating-houses, 
whose guests have abandoned them because they were 
unable to bear the expense of furnishing customary bev- 
erages; a result difficult to reconcile with any known 
principle of justice. 

If it be thought just, as it appears to be by a great many 
people, to prevent men of little wealth from engaging in 



282 THE METHODS OF TAXATION 

the liquor traffic, it may still seem reasonable that the 
license taxes paid by those who do engage in the traffic 
should be graduated, even if only by the rude standard 
of the rent of the premises occupied. It cannot be denied 
that in England, especially when compensation is granted 
for the refusal of the government to renew a license, very 
great difficulties are encountered in estimating this rent, 
the premises (called "Tied" houses), being often owned 
by brewers who supply the liquor sold, and who can mingle 
the elements of price and rent inextricably. Some ap- 
proximation to the truth is after a fashion attained, and 
perhaps no more accurate measure of the profits of a 
dealer can be employed than the rent that he pays. To 
carry on a larger traffic he must have more space and 
a better situation, and the landlord may on the whole be 
trusted to see that when very great profits can be made 
by the use of his property, very high rent shall be paid 
for it. A license tax of this kind, therefore, might be 
only in part paid by the consumer, but would fall also on 
rent, and on rent which it may be thought peculiarly just 
to tax at an exceptional rate. In what are called the resi- 
dential parts of a town, the proximity of a place where 
drink is sold frequently depreciates house rent, and it 
seems reasonable that those who obtain high rents by 
means of a traffic that impairs the rents of their neigh- 
bors should pay correspondingly higher taxes. It does 
not necessarily follow, however, that this tax should be 
levied by means of a license fee; it could obviously be 
paid as a tax on rent, or on land, as in the case of other 
premises having a high rental value. 

So far as these license taxes are required of retail 
dealers, they do not seem to increase the cost of what is 



THE ECONOMIC METHOD 283 

sold by much niore than the amount of the tax. This is 
because the tax, to the extent that it is collected from the 
consumer, is collected with little delay, the commodity 
taxed passing at once into consumption. When the license 
is required of wholesale dealers and of producers this is 
no longer true, and there seems no reason either on fiscal 
grounds or as a police regulation why such taxes should 
be repeated a number of times. When the tax on retail 
dealers is made very high, the expense of collection be- 
comes much greater. The temptation to illicit sale be- 
comes very strong, and a large force of inspectors must 
be maintained not only to secure revenue but also to pro- 
tect legitimate dealers against ruinous competition. The 
expense is of course still further increased when there is 
also a heavy tax on production, a point which has already 
been illustrated in considering taxes on luxuries. These 
remarks apply in the main to taxes on tobacco as well 
as on alcoholic drinks. They are all objectionable on the 
principles of the economic method ; but they are supported 
by a public opinion that cannot be disregarded. When 
the traffic in liquor is in question, the principles of justice 
ordinarily accepted by men cease to be binding, and no- 
body who engages in this traffic needs expect that his pro- 
tests against unjust legislation will receive much attention. 
Whether it is on the whole for the welfare of the society 
that this traffic should be forced into the hands of men 
who are treated as social outcasts, if not as outlaws, seems 
to be a question that arouses little public interest. 

What are known as stamp taxes, with which most other 
countries are cursed, are fortunately not here prevalent. 
The name is misleading, or at least not descriptive, for 
it tells nothing of the nature of the tax,' but merely refers 



284 THE METHODS OF TAXATION 

to a particular evidence of payment. In a few cases, the 
stamp indicates the payment of a tax by the producer. 
The beer tax, for example, is paid in the purchase of 
stamps, one of which is affixed to every barrel of beer by 
the brewer, in such a manner that the beer cannot be 
drawn without cancelling the stamp. This tax, whatever 
may be thought of it as a sumptuary impost, is on the 
whole very economically collected. Owing to the bulky 
character of the commodity it is not easy to produce it 
illicitly, and owing to the fact that it enters into con- 
sumption almost immediately after the payment of the 
tax, the enhanced cost to the consumer is very slight. The 
tax, too, is very moderate, and is perhaps fiscally the 
most productive and advantageous of all sumptuary taxes. 
Breweries are not very numerous, and a small force of 
inspectors can supervise them. Beer, unlike spirits, is 
produced solely to be drunk, and a tax upon its produc- 
tion seems hardly burdensome to any other industry. The 
national government still levies an absurd and unpro- 
ductive tax on playing-cards, but with that exception, and 
that of the stamps on packages of tobacco, oleomargarine, 
etc., it has no other stamp taxes of importance. The State 
of New York is perhaps the only one that has adopted the 
pernicious policy of taxing sales, or transfers of property, 
by means of stamps, as will be presently explained. 

The fallacy that is likely to arise from making such 
a class as that of stamp taxes, is due to the fact that some 
things are of a relatively permanent and indestructible 
nature, while others are immediately consumed and en- 
tirely disappear. A tax on beer and a tax on the transfer 
of title to real estate may both be collected by means 
of stamps, but they are very different in their effects. 



THE ECONOMIC METHOD 285 

The tax on beer may be regarded as a tax on the sale of 
beer; but it is collected only once. The tax on the sale 
of real estate is collected whenever a sale takes place. 
It may be collected several times in a single year, and 
several dozen times in the course of a number of years. 
Eeal estate, however, is something that is transferred com- 
paratively seldom, while the title to a share of stock in 
a corporation is now-a-days transferred perhaps several 
times in a single day. It seems best, therefore, to ignore 
the accident of affixing a stamp, and to confine the atten- 
tion to the essential element of the burden of the tax. 
With the exceptions noted above, we may safely treat 
stamp taxes as taxes on sales, or transfers of title. Some 
of them might be classified as taxes on acts ; such are the 
English taxes on agreements, on many legal formalities, 
and on receipts for the payment of sums over ten pounds. 
These acts, however, almost always relate to the transfer 
of property. In the case of receipts it is to be presumed 
that some thing or some service has been paid for ; and in 
the other cases property is usually involved, the value of 
which must be reduced by whatever increases the expense 
of transferring it. Such taxes are all hindrances to that 
freedom of barter or exchange which is the vital principle 
of our modern industrial system. It is to be added that 
by far the largest part of the revenue from the English 
stamp taxes comes from conveyances and mortgages of 
real property and from sales of shares of stock. Nobody 
can doubt that such taxes, even when graduated accord- 
ing to the value of the property, are altogether arbitrary 
and unequal, owing to the uncertain number of the sales 
of any particular piece of property, and they evidently 
lessen the value of the property affected. 



286 THE METHODS OF TAXATION 

Bearing in mind the foregoing cautions, we may safely 
treat the great body of taxation as consisting (1) of taxes 
levied according to the capitalized or rental value of tan- 
gible property ; and ( 2 ) of taxes levied either on the phys- 
ical transfers of such property or on the transfers of title to 
it. The second class of taxes, as has been already sug- 
gested, tends to affect the value of what is subjected to 
taxation of the first class. Taxes on the physical transfer 
of things — and we may with some important qualifica- 
tions include persons — are levied chiefly on railroad or 
water transportation, and on imported goods. We might, 
it is true, regard imported goods as sold by a foreign 
producer or merchant to a resident of this country, and 
customs duties could then be treated as taxes on sales. It 
would make little difference if this classification were 
adopted; but it may often be the case that the goods are 
produced or bought by a resident of this country, and are 
not sold by him until after he has paid the duty on them. 
For this reason, and because the physical act of importa- 
tion is visible and notorious, it seems proper to make a 
class of the taxes specifically declared by statute to be 
due when that act takes place. The foreign origin of the 
goods may be in the view of the scientific economist noth- 
ing but an accident; but it is an accident so conspicuous 
and so familiar to every one that it might cause confusion 
to ignore it. In principle, however, a tax on imported 
goods does not differ from a tax on the production of 
spirits or beer. The essential fact is that both must be 
paid before the commodity can enter into trade or 
consumption. 

Owing to the prevalence of some grave misunderstand- 
ings, it seems desirable to consider separately taxes on 



THE ECONOMIC METHOD 287 

incorporations, and on what are commonly called monopo- 
lies. A corporation, from the industrial point of view, 
is nothing but a number of persons who contribute some 
of their wealth for the prosecution of an enterprise which 
is managed by trustees or agents chosen for that purpose. 
Apart from statutory restrictions, there is no reason why 
the enterprises carried on by means of corporations should 
not be carried on by means of firms or by individuals, 
except their occasional magnitude. Some of these enter- 
prises are perhaps necessarily on such a colossal scale that 
no individual could command the capital required. Nor 
could any firm or partnership carry them on, because the 
common law makes every member of a partnership liable 
for its debts to the extent of his whole private estate, and 
prudent men will incur this risk only when they know the 
responsibility of those with whom they are associated — a 
condition which cannot be complied with when their num- 
ber is large. It has therefore been the policy of the legis- 
lature in modern times to limit the liability of those who 
incorporate an enterprise to the amount of the capital, 
usually, which they contribute. 

The economic gain from this limitation has been beyond 
question enormous. A vast amount of wealth which could 
not be productively employed with safety by those who 
have saved it, is rendered available to industry. Enter- 
prises which could not otherwise have been undertaken 
at all become practicable ; enterprises which could be car- 
ried on to little advantage on a small scale become profit- 
able. By this means a very great number of people who 
were formerly obliged to employ their capital in a single 
form of industry under their own supervision, or who had 
great difficulty in safely employing it at all, are enabled 



288 THE METHODS OF TAXATION 

to participate in the profits of nearly all the industries 
of the country. They are also enabled by the exercise of 
their own judgment, or that of competent advisers, to 
distribute their investments in so many ways that the 
failure of one enterprise will be balanced by the success 
of the others. In spite of the very great losses that have 
been incurred through the mismanagement of corporations, 
the evidence appears to be conclusive that, before this form 
of investment was available, the losses not only from ina- 
bility to invest but also from the mismanagement of such 
enterprises as were open to investors, were relatively much 
greater. ISTor do the figures of modern trade show that 
the losses of creditors are any greater from the failure of 
companies of limited liability than from the failure of 
firms or individuals; it would perhaps not be very diffi- 
cult to prove that quite the contrary is true. 

From these premises two important conclusions follow. 
In the first place it is obvious that when an enterprise can 
be made profitable only by the use of a vast capital, its 
existence cannot be said to limit the opportunity of a man 
of little capital to engage in it. He could not do it, no 
matter whether his competitor were a corporation or an in- 
dividual. ~No man having little capital could build and 
manage an ocean steamship ; and if corporations were not 
tolerated, it is doubtful if they could be built to any great 
extent, if at all. It is of course true that if there were no 
enterprises on a large scale, there would be, in a sense, 
more opportunity for small capitals. If there were no 
large vessels, there might be more small ones; just as if 
there were no mowing machines or harvesters there would 
be more scythes and sickles. Experience, however, does 
not support this view. Every great enterprise begets a 



THE ECONOMIC METHOD 289 

number of little ones. It creates a demand for new things 
and enlarges the demand for old ones. 1 If justice consists 
in increasing opportunities for the employment of small 
capitals, it will not be furthered by diminishing the op- 
portunities for the employment of large ones. To lay ex- 
ceptionally heavy taxes on such employment may therefore 
tend to hinder rather than to promote the attainment of 
justice ; and even if large concerns prevent the growth of 
small ones, it would still be true that they afford, by the 
division of their stock into shares, an almost limitless 
increase in the opportunities of the small investor. 

The second conclusion is that when an enterprise can 
be carried on by a corporation with a small capital, no 
diminution of the opportunities for individuals results. 
Any individual can incorporate his business if he chooses. 
By doing so he can perhaps obtain more capital and operate 
with less risk ; but so can his competitor. He can obtain 
more capital, however, only by sharing the profits of the 
business with those who furnish the capital, which is the 
same thing as offering them an opportunity for investment. 
There is no economic reason why a corporation should have 
better credit than a firm or an individual of equal re- 
sources; indeed, because of its limited liability, it should 
have less credit. No doubt many of the managers of cor- 
porations have been dishonest; they have cheated their 
shareholders and their creditors. It is equally true that 
many partners in firms, and many individual traders have 
been dishonest ; the records of the bankruptcy courts afford 
ample evidence. Dishonesty in the management of cor- 

1 On this point some figures presented by the late Edward Atkinson 
are instructive. The number of small industries existing in the City of 
Boston he found to be surprisingly large, and to show a marked ten- 
dency to increase. 

19 



290 THE METHODS OF TAXATION 

porations may be on a larger scale, because their operations 
are on a larger scale ; but it is on the whole more difficult 
and more liable to exposure. And, as there is an economic 
gain in the increased opportunity for investors afforded by 
incorporated enterprises, so there is a diminution of loss, 
owing to the wider diffusion of the effects of failure. 

No principle of justice, therefore, seems to forbid carry- 
ing on business, on either a large or a small scale, under the 
corporate form ; on the contrary, justice seems to demand 
that it should not only be permitted but even encouraged. 
Hence the practice of laying heavier taxes on capital em- 
ployed in this form than on that employed by individuals 
may seem unjust. It is like laying a tax on any improved 
method of production or exchange; it increases the price 
at which the society would obtain better service or cheaper 
goods. There may be economic reasons why such taxation 
should sometimes be adopted; and many of the taxes on 
corporations are of such a nature as to be collected with 
little expense and with much certainty. It may be very 
proper to collect a fee for issuing a license to a corporation, 
and perhaps a fee for registering its certificates of stock; 
but when these fees are made to produce revenue they be- 
come taxes, and have the same effect as taxes on individuals 
engaged in business. They are similar to the Erench 
patentes, and like them tend to result in increased burdens 
on the consumer. So long as they are not very heavy this 
result may be imperceptible ; but in that event they may 
not produce revenue enough to pay the officers employed 
to collect them. If they were made very heavy they might 
not produce very much more, for the economic gain from 
incorporation might be neutralized. But owing to the 
exposure of scandalous abuses in certain concerns, a tor- 



THE ECONOMIC METHOD 291 

rent of denunciation has been recently directed against 
corporations in general, and they are not likely to be soon 
relieved of discriminative taxation, even though it fall 
eventually, in some degree, on those who indulge in denun- 
ciation of this kind. 

As a condition of limiting the liability of shareholders 
to pay the debts of their company, the legislature imposes 
many restraints which do not apply to individuals. The 
charter may be issued only for a term of years, and it is 
subject to alteration or repeal. The amount of the profits 
distributed as dividends may be limited, and burdens of 
many kinds may be imposed, including special rates of tax- 
ation. In defense of these restraints it may be said that 
shareholders do not exercise proper control over their 
agents; the managers of corporations do as they please, 
and may use their powers to oppress weak competitors. 
!No manager of a corporation, however, can be quite so 
arbitrary as an individual, or a firm, of very great wealth. 
He may do a great many arrogant and oppressive things ; 
but he does them at the risk of being made chargeable as 
a trustee. He is in fact usually the representative of a 
few men of great wealth, who can prescribe his conduct 
and displace him if it does not please them. These men 
would be powerful in any event, and the restraints that 
the legislature can impose on corporations, cannot be im- 
posed on them, except by general laws which would restrain 
the activities and reduce the opportunities of poor men 
much more than those of the rich. It is undoubtedly a 
very dangerous course for the legislature to empower cor- 
porations to do certain acts which it forbids individuals 
to do ; the disgraceful history of many, if not of most, of 
the banks chartered by the states before the Civil War shows 



292 THE METHODS OF TAXATION 

this plainly enough. When the legislature adopts this 
policy, it is of course necessary to prescribe the terms on 
which these special powers may be exercised. It does not 
follow even then that corporations exercising these powers 
should be taxed at an exceptionally high rate. When an 
act is unjust, whether done by an officer of a corporation 
or by an individual, it is not to be punished or prevented 
by laying taxes on the business in which that corporation 
or that individual is engaged; still less when such taxes 
must be laid on all corporations engaged in such business, 
whether their officers are guilty of such acts or not. Such 
taxes are apt to fall in the end with accumulated weight 
not only on shareholders, who may be ignorant or innocent, 
but also on consumers, who are both. , They may be re- 
garded as belonging to the class of taxes on the capitalized 
value of tangible property, even when they are called 
franchise taxes. 

It has seemed necessary to consider this subject at some 
length and with some repetition, because the tendency to 
personify abstractions, inveterate in mankind, seems to 
influence much of the discussion and even of the legislation 
concerning corporations. They are constantly spoken of 
as if they were persons, having all the vices, although 
perhaps not all the virtues, of sentient beings. They are 
accused of ambition, of oppression, of corruption, of greed, 
of dishonesty, of robbery. Such charges evidently cannot 
be sustained against metaphysical entities; they imply 
personality. A corporation, however, is a person only by 
a figure of speech. It is a legal term signifying that a 
number of persons may agree to combine for the purpose 
of using their wealth in carrying on a certain business 
according to the terms of a charter or franchise granted 



THE ECONOMIC METHOD 293 

by the legislature, in which case they may sue and be 
sued collectively under their corporate name. These per- 
sons, the shareholders or stockholders, being too numerous 
to transact business, must employ trustees and managers; 
they are pecuniarily responsible for the acts of such agents, 
but the conditions are such that they can have little moral 
responsibility. It is really the managers who are respon- 
sible, whose acts have moral quality, who may be blame- 
worthy, who may be guilty of all the iniquities attributed 
to corporations. 

It seems clear that if any law is broken it must be by 
these persons, and that they are the persons to be punished 
as individual malefactors are punished. The directors 
or trustees who appoint them may sometimes instruct them 
to disregard the law, and may thus participate in their 
guilt, and deserve to share their punishment. But to 
" punish a corporation," when its managers have been 
guilty of crime, by depriving the shareholders of some of 
their property, is certainly a very primitive way of admin- 
istering justice. With the wonderfully extensive ramifica- 
tions of our modern credit system, it may be, by depreciat- 
ing the value of the securities of the corporation, to punish 
millions of depositors in savings banks and holders of life- 
insurance policies, some of whom may never even have 
heard of its existence, and none of whom have any knowl- 
edge of the acts of its managers. It seems still more un- 
reasonable to propose to " curb " or " chastise " corpora- 
tions in general, because the managers of some of them have 
violated the law. The zeal with which such violations are 
frequently denounced seems little more discriminating 
than that of the leader of the Catholics in the massacre at 
Beziers, with his cry : " Tuez tou jours; Dieu reconnaitra 



294 THE METHODS OF TAXATION 

les siens ! " To levy taxes on corporations under the influ- 
ence of such zeal seems not likely to have consequences 
either morally or economically desirable. 

!N"o one who considers the outcries against monopolies 
can fail to be struck with the confusion of thought which 
these outcries imply. Attention has already been called to 
the distinction between a monopolist and a monopoly ; be- 
tween an individual exercising a certain right of property, 
and a right of property which may be exercised by a large 
number of persons, as in the case of shareholders in a cor- 
poration. We may say broadly that a monopoly exists 
whenever a right of property is of such a nature as enables 
its owner, or owners, to obtain from its exercise more than 
what is called, to use Adam Smith's language, fair, ordi- 
nary, reasonable profit. This definition may not seem sci- 
entifically accurate, for the exclusion of competition which 
is usually associated with the term monopoly may not en- 
able its owner to obtain more than ordinary profit. A 
substance might conceivably be found only in a single mine, 
and yet the price at which it could be sold might be only 
enough to pay the cost of production. So a railroad might 
be the only means of transportation between two places, 
while the cost of operating it might be so great as to leave 
little profit for its owners; and there are in fact many 
such cases. Where competition would not take place, there 
can be no injustice in its exclusion. It is evident, there- 
fore, that to constitute a monopoly in the ordinary sense, 
there must be such a right of property as actually enables 
its owner, by the employment of a certain amount of cap- 
ital, to obtain more than the usual rate of profit thereon. 

Now there are monopolies deliberately and intention- 
ally created by the legislature. Such are patent rights, 



THE ECONOMIC METHOD 295 

which are a species of property of very long standing, and 
of scarcely questioned justice. The legislature explicitly 
grants to one who invents a new process the right to make 
use of it, to the exclusion of all other persons. Many of 
these rights, no doubt, prove to have little or no value, and 
can produce no profit. But it is reasonable to presume that 
as a class such rights have a value; in many instances 
these values have proved to be almost fabulous. This result 
is obviously contemplated by the legislature; it is too 
notorious to be ignored. The policy is to stimulate in- 
ventors with the hope of exceptional profits. Were they 
to spend years of thought and toil in developing processes 
which any one might freely use, they would obtain no 
reward for their labors. Their monopoly is their reward, 
and to impose special taxes. on such monopolies is plainly 
inconsistent with the general policy. It would be to take 
away with one hand what was bestowed with the other, and 
would destroy the whole system of granting patent rights 
for the purpose of encouraging invention. So long as the 
system prevails, the monopolies that it creates must be free 
from exceptional taxation. This principle is the founda- 
tion on which numbers of great industries have been built, 
and to repudiate it would be such a disappointment of rea- 
sonable expectations as justice could not tolerate. With 
due notice it may be modified and even abandoned in the 
future, but vested rights must be respected. 

Another class of monopolies created by the legislature, 
although not with such explicit declaration of purpose, is 
that promoted by the policy of laying on imported goods 
duties from which similar goods produced in the country 
are exempt. So far as there is free competition in the 
production of such goods, this policy may not create monop- 



296 THE METHODS OF TAXATION 

olies. The manufacture of cotton cloth, for example, 
seems to be a business in which any one with sufficient 
capital may engage with as much opportunity for making 
a profit as his competitors. When the duty on cotton cloth 
was first imposed, to be sure, those engaged in the manu- 
facture may have for a time made exceptional gains ; but 
competition would tend to make them temporary. But 
there are many concerns that, as we say, produce their own 
raw materials; they have two sources of profit. The 
great companies manufacturing iron and steel own mines 
of coal and iron ore, and it seems clear that the exclusion 
of foreign coal and iron ore tends, by limiting competition, 
to increase the price of the domestic products, and the value 
of the mines from which they are obtained. This result 
is too obvious to have been unforeseen by the legislature; 
the avowed purpose of what are called protective duties is 
to increase the gains of domestic producers, and it would 
be absurd to maintain that when it laid a tax on imported 
coal the legislature did not intend to benefit the owners of 
coal mines in this country. So far as such owners possess 
a monopoly, it must be regarded as to a certain extent 
created deliberately by the legislature, and it would be 
inconsistent with the whole theory of protective duties to 
lay exceptional taxes on things to which these duties are 
meant to give an exceptional value. If the protective policy 
is just, such taxes, being inconsistent with that policy, 
would be unjust. 

Still another class of monopolies purposely created by 
the legislature is that of companies formed for building 
and operating railways, and for the supply of water, light, 
etc., to towns. The status of persons owning rights of prop- 
erty so created is somewhat peculiar ; they are authorized, 



THE ECONOMIC METHOD 297 

on paying compensation, to take the property of other per- 
sons for the uses prescribed by the legislature. In other 
words, they exercise the right of eminent domain, a right 
usually regarded as a sovereign prerogative. For the sov- 
ereign to delegate this right was a proceeding which, at the 
beginning of the railroad era, aroused a good deal of ques- 
tion; the debates which took place in the courts and else- 
where may still be read with interest. The economic gain 
from the construction of railways was, however, perceived 
to be so great as to make it imperative to secure it, and the 
franchises of these corporations were soon established on a 
legal basis. So urgent was the demand that the general 
government presented vast tracts of land to such persons 
as would risk their capital in these comparatively untried 
enterprises, and pledged its credit as security for their 
loans, while states, counties, and towns vied with one an- 
other in offering like inducements. It needs no argument 
to prove that these land grants and other bounties were 
intended to bring exceptional profits to the recipients ; that 
was their avowed purpose and their obvious result. Mo- 
nopolistic gains of this kind may be classed with those of 
the grantees of patent rights ; both are held out as induce- 
ments to employ money and labor in particular ways, and 
it seems as unreasonable in one case as in the other to 
defeat this policy by exceptionally heavy taxation. Many 
of those who invested their money in railroads lost it all, 
as many inventors have lost their time and trouble, and the 
exceptional gains of some investors and some inventors 
must be regarded as meant by the legislature to persuade 
men to take the risk of such losses. 

For the legislature to attempt to deprive men of the 
gains thus deliberately promised them seems unjust, as 



298 THE METHODS OF TAXATION 

being a disappointment of reasonable expectations. The 
doctrine of estoppel, which is imbedded in the national 
constitution in the form of a prohibition of laws impairing 
the obligation of contracts, is a necessary condition of 
industrial progress, and even of civilized life. To keep 
promises is elementary morality, and promises made by an 
authorized agent are as binding as if made by the princi- 
pal. Rulers chosen by the people are the people's agents, 
and so long as they act within their authority, the people 
cannot justly repudiate their contracts. Nor can they in 
fact successfully repudiate them if they would, for the 
courts must enforce the constitution. Ko doubt, in many 
cases, the legislature has exceeded its authority; it has 
made contracts that it was not empowered to make. Such 
contracts may be justly repudiated; the expectations that 
men form concerning their results may not be reasonable. 
He who deals with an agent, whether an individual or a 
legislature, must assure himself of the agent's powers, if 
he proposes to hold the principal. The courts seem to 
have held the balance fairly even. They have enforced 
valid and abrogated invalid contracts. 

The foregoing statements need to be qualified in some 
important respects. As the excitement aroused by the 
advent of railroads subsided, cooled frequently by the fail- 
ure of many of them to earn the interest on their bonded 
debts, the charters granted became less liberal. The term 
of existence was usually limited, bounties ceased to be 
given, power to amend charters was reserved, and in vari- 
ous ways investors were warned not to be too sanguine in 
their expectations. And there was always a warning in 
the very character of the business carried on by railroads. 
At the common law a carrier who plies his trade on the 



THE ECONOMIC METHOD 299 

highway is subject to regulation. He makes use of the 
highway not as an incident to his other business, but as 
an essential part of his business. Since the highway is 
maintained at the expense of the public, such exceptional 
use of it justifies the legislature in exacting some equiva- 
lent for the public benefit. This may be done by requiring 
the carrier to maintain the highway, or to pay part of the 
expense of maintaining it ; or the carrier may be required 
to serve the public at reasonable rates. 

When our first railroads were built, it seems to have 
been supposed that they were enterprises of the same kind 
as the old " turnpike " companies. These companies were 
empowered to lay out or improve highways, and to reim- 
burse themselves by taking toll from those who made use 
of their improvements. A railroad, it was thought, would 
construct its line, and any one could load his own car and 
haul it over the line, as a farmer drives his cart over a turn- 
pike. This theory which, grotesque as it may sound, has 
been seriously propounded by some modern writers as the 
true one, was very soon abandoned, and the railroad com- 
panies not only constructed their lines but also conducted 
all the traffic thereon. But as their lines could be con- 
structed only by the exercise of the right of eminent do- 
main, they retained some of the legal qualities of highways, 
and the companies were allowed exclusive rights only on 
the ground that they were common carriers. As common 
carriers their charges have always been subject to regula- 
tion by the state, and have often been reduced when they 
were unreasonably high, and perhaps sometimes when they 
were not. The exceptional inducements held out to inves- 
tors in railroads, therefore, must always have been viewed 
in the light of this possibility of governmental regulation, 



300 THE METHODS OF TAXATION 

and the proper exercise of this power constitutes no dis- 
appointment of reasonable expectations. Nor has its 
proper exercise, perhaps, been regarded as unjust by the 
owners of railroad property. They have complained not 
that the legislature has forbidden them to exact rates that 
were unreasonably high, but that it has compelled them 
to accept rates that were unreasonably low. The question 
has always been, and is, one rather of fact than of principle. 
The owners of railroads, like the owners of other prop- 
erty, have as a matter of course been subjected to taxation 
on their property ; and often, too, on their debts. Whether 
they should be subjected to a higher rate of taxation de- 
pends partly, as we have seen, on the rights granted them 
by their charters, and partly on the relation that such taxes 
bear to the cost of furnishing transportation. It must be 
admitted that when reasonable rates have prevailed, to in- 
crease the cost of furnishing transportation, whether by 
taxes or by other means, may make it necessary to increase 
the rates. That is to say, a tax levied on the railroad may 
be really paid by those who travel on it, or whose goods are 
carried by it, and be thus ultimately diffused throughout 
the whole society. Such a tax may or may not be advan- 
tageous ; it falls into the class of taxes on the transfers of 
goods, which are yet to be considered. So far as the 
owners of a railroad obtain more than the ordinary rate 
of profit under the guarantee of their charter, it would 
seem that they may properly charge such rates as will give 
them this profit, and that such rates cannot justly be re- 
duced either by specific ordinance or by special taxation. 
So far as monopolistic profit is not secured by contract 
with the legislature, it may be reduced by lowering rates 
so as to extinguish it, or by imposing taxes without permit- 



THE ECONOMIC METHOD 301 

ting an advance in rates. When such a reduction takes 
place> the owner of railroad property is deprived of an 
" unearned increment " of value. Whether he can be 
justly so deprived depends on the answer to the question 
whether all unearned increments should be specially taxed, 
or only those owned through certain kinds of corporations. 
Some reasons were given at the outset for believing that the 
conviction that it would be unjust to deprive individual 
owners of all such increment in the value of their land was 
too deeply rooted to be overthrown. It remains to consider 
whether the circumstance that the individual owns land in 
partnership with others, by means of a railroad corpora- 
tion, seems properly to modify this conviction. 

Eeference has been made to the grants of land made 
to the builders of railroads, especially by the general gov- 
ernment. But similar grants have been and are now made 
to individuals. Many millions of acres have been bestowed 
in this way, freely, or for a nominal consideration. Many 
of these millions have increased enormously in value; 
lands bought for a dollar or two an acre are now worth a 
hundred times their cost to the first occupant. A certain 
part of this increment is due to the expenditure of labor 
on the lands. A large part of it, however, is due to the 
growth of population and to the construction of railroads, 
without which the products of these lands could not have 
been marketed. This cause is even now in constant opera- 
tion ; new lines of railroads, operated by electricity as well 
as steam, are every year adding to the value of the lands 
through which they are constructed. The most impressive 
illustration of this process is afforded by the extension of 
the local railroads in the City of ISTew York, to which allu- 
sion has been already made. When the elevated railway 



302 THE METHODS OF TAXATION 

was extended to the northern part of Manhattan Island, 
the price of land there promptly advanced, sometimes to 
tenfold its former figure. It admits of no question that 
this increment of value was, to a large extent certainly, 
unearned. As between individuals, it might be contended 
with some show of reason that this increment belonged to 
the owners of the elevated railway. They risked their 
capital, they paid damages where they injured property, 
and they might well claim the profit where they bettered it. 
There is no evidence, however, that either the farmers of 
the West, or the landlords of New York, are at all dis- 
posed to recognize such claims. They seem to hold it just 
to retain the unearned increment in the value of their 
lands, while many of them hold it unjust that the owners 
of the railroads which contributed to this increment should 
enjoy a similar advantage. 

This paradox is not explained by any difference in the 
service rendered to society by the two classes of owners. 
Perhaps on the whole and as a class the managers of the 
railroads have done more than the farmers for the public 
weal. Much of the agriculture in the fertile prairies of 
the West has been wasteful, and even destructive. The 
soil has often been robbed, and not very much attention is 
even now paid to maintaining its fertility. The owners 
of forest lands have been even more regardless of the com- 
mon interest. They have enriched the present generation, 
and impoverished posterity. On the other hand the rail- 
road managers have improved their properties steadily, 
and with wonderful skill. They have furnished transpor- 
tation of constantly improving quality at constantly dimin- 
ishing rates, and no small part of the increased value of 
their property is fairly earned by the intelligence which 



THE ECONOMIC METHOD 303 

they have displayed in developing it. Probably no one 
would assert this of the class of persons who have been en- 
riched by the increase in the value of their unoccupied 
lands in the City of New York. Such persons may have 
displayed much intelligence in the purchase of their lands, 
but most of them seem to have been contented to accept 
the increased values that have been, as it were, forced upon 
them, without much thought of rendering an equivalent. 
It would be absurd to impute any special degree of virtue 
to the owners of railroad property ; they are no better than 
their neighbors. Nevertheless it may be maintained that 
their property has been managed with rather more intelli- 
gent reference to the future interests of the community 
than in most cases of individual ownership. 

The explanation is to be found partly in the fact that 
railroads are built and operated by the agents of the owners, 
and not by the owners themselves. The human element of 
proprietorship is veiled by the corporate entity, and the 
right of property is based on a certain invasion of older and 
more fundamental rights. This use of eminent domain 
seems a privilege ; it is a favor, granted for the benefit of 
the community it is true, but still invidious. He who will 
build a railroad may deprive his neighbor of his land. He 
must pay for what he takes, but on that condition he can 
take by force. He renders a service to the public, and he 
may justly claim a fair compensation, but his claim to 
more than this lacks the support of immemorial usage, 
which is the bulwark of the title of the individual owner 
to the accretions in the value of his land. Such an owner 
holds title by grant in fee simple absolute ; he has expro- 
priated no one, and no trust is implied in his ownership. 
His dominion is of ancient origin; it is imbedded in the 



304 THE METHODS OF TAXATION 

common law and in our constitutions. The title of the 
railroad owner is of modern origin, it is statutory, and 
limited to a special use. It has the support of law, but not 
the support of sentiment, which has always justified the 
retention by the freeholder of all the increase in the value 
of his land, be it earned or unearned. The freehold has 
the sacredness of a home; its associations make it much 
more than a mere embodiment of pecuniary value. The 
owner spends his own labor on it. He makes his living 
from it, and he has an intimate, personal interest in its 
products. As a landlord he may obtain from consumers 
prices that have an element of monopoly, but as he does 
not directly deal with consumers they do not realize this. 
The public grumbles at the high prices of food, but it never 
blames the farmer for them. 

There is nothing sentimental about the ownership of 
a share in a railroad. The owner can pretend no attach- 
ment to the land in which he has a share. He cannot plead 
his affection for a roadbed, which he may never have seen, 
which he cannot use as a home, which he has spent no 
labor on, which he can utilize only as a money making 
machine, and by means of agents who have hardly more 
personal interest in it. Eor the services rendered by this 
machine the public pays directly in fares and charges, and 
it is incessantly watchful over their amount. It admits, 
rather grudgingly perhaps, that the owners of this machine 
deserve a reasonable compensation, but it is reluctant to 
concede that this compensation should include the element 
of unearned value. The law may recognize this claim, 
contracts may assert it, courts may enforce it; but it 
lacks the moral support and prestige that ancient custom 
and precedent and sentiment have thrown about the absolute 



THE ECONOMIC METHOD 305 

right of the individual freeholder. Whatever may be true 
of corporate rights acquired in the past, it is evident that 
in the future, unearned increments in the value of the prop- 
erty of public corporations are not likely to be held sacred, 
and may after due notice be subjected to special taxation. 
As has been observed, there may be a monopoly without 
monopolists. All the shares in a railroad may be held by 
persons who have paid prices based on the entire value of 
the property, earned or unearned, and who may receive no 
more than the ordinary return on their investments. It 
would be unjust to confiscate their property; but hence- 
forth prudent investors will hesitate to pay for prospective 
values, which public opinion may justify the legislature 
in annihilating as soon as they come into existence. 

In the foregoing statement railroad companies have been 
taken to illustrate principles that apply generally to com- 
panies acquiring rights in trust for the public. Water 
companies, and telegraph and telephone companies, cannot 
operate without exercising the right of eminent domain, 
and are as subject to regulation as railroads. Street rail- 
ways and companies furnishing light may occupy a slightly 
different position. Such companies must make use of 
highways, and where the public ownership is limited to the 
surface, it would seem that abutting owners might claim 
compensation for their expropriation from the soil beneath 
and the air above. Where the fee of the land on which the 
highway is laid out belongs to the public, there may be no 
occasion to condemn private property. But the difference 
is not very material. In every case certain persons are 
allowed to make use of property which they have not 
acquired by grant in the usual form, and which they can 
use only for a purpose and on terms prescribed by a public 

20 



306 THE METHODS OF TAXATION 

authority. When property so acquired advances in value 
through other causes than the expenditure of the grantee's 
capital thereon, the principles already stated in the case 
of railroads seem to apply. The right to the enhanced 
value may be secured to the owners of the property by con- 
tract; or, if not, this value may be subjected to special 
taxation by means of franchise taxes or higher assess- 
ments, or it may be extinguished by lowering the charges 
for the services rendered to the public so as to produce 
only the ordinary return on the capital invested. Both 
processes may conform to the progressive method ; whether 
they conform to the economic method is a question more 
difficult to answer. 

According to the established doctrine of economics, the 
owner of a monopoly fixes the price charged for his com- 
modity at such a rate as to bring him the greatest possible 
profit. As has been pointed out, this may be only the or- 
dinary or reasonable profit, which cannot properly be sub- 
jected to exceptional taxation. When the profit is greater, 
the gross receipts of the monopoly may be taxed ; but the 
result might be to make it for the advantage of the monop- 
olist to furnish less of his commodity at a higher price. 
His gross receipts and his net receipts might both be dimin- 
ished, but the latter to a less degree than the former. A 
tax on net receipts, or a tax on the monopoly as a unit, 
cannot be thus avoided. As it seems impossible to devise 
any satisfactory method of taxing monopolies as units, 
the tax on net receipts is properly adopted. It may be 
levied directly; but the same result might be attained by 
taxing the property of the monopoly, if its value could be 
precisely determined. This is what is attempted in taxing 
what are called franchises, as is now done in the State of 



THE ECONOMIC METHOD 307 

!New York. The courts held that the rights in the high- 
ways enjoyed by various companies were not taxable as 
real estate. The value of these rights had become very 
great, and they would seem to be properly easements, but 
as the law stood they were not so classified. The amended 
law in effect made them taxable under the name of special 
franchises. Had they been assessed as personal property, 
the debts of the companies might have been deducted, thus 
leaving nothing subject to the tax. A franchise in this 
sense may be defined as a right to operate, but as this right 
must be exercised by means of the easements in the streets, 
the value of the franchise and the value of the easement 
are practically the same. 

The important point is that this value must be measured 
by the profits of the company. If it does not earn any- 
thing its franchise is worth nothing. We are thus brought 
back to the taxation of net receipts as the only practicable 
method. The problem is really one of assessment. If we 
would tax property we must assign it a value, and we must 
be guided by the rent or profit that the property will 
produce. When we have to deal with the property of a 
company of this kind, we find it impossible to assign 
values to the several parcels of which it is composed. The 
fact that a parcel might have a certain value if used for 
another purpose is immaterial; it is essentially a part of 
a complex whole. We cannot say of a locomotive engine 
that this wheel has a certain value and that cylinder an- 
other; even if we could ascertain the cost of producing 
the separate parts we should not know the earning power 
of the machine, and it is that which fixes its value. The 
attempt to tax a railroad piecemeal leads to inequalities 
in assessment that may without exaggeration be described 



308 THE METHODS OF TAXATION 

as frightful. Local assessors are under a constant pres- 
sure to assess the owners of such property, who have no 
votes, at the highest possible figure, as this enables them 
to reduce the taxes of their neighbors, by whose votes they 
hold office. But when a railroad constructs a costly bridge 
the increased value seems properly assessable as belonging 
to the railroad as a whole, and not to that part of it situ- 
ated in a particular taxing district. 

A recent investigation by a parliamentary commission 
in England has disclosed many striking instances of such 
inequality. In addition to the stamp taxes, the passenger 
tax, and the income tax, railway property is assessed to the 
rates or local taxes, usually at very high figures. In one 
parish the land of the Great Western Railway is rated at 
£284 an acre, other lands at £3 6s. The Midland Railway 
pays in 180 parishes from 16 per cent to 83 per cent of 
the rates, while its acreage never exceeds five per cent and 
does not average two per cent. In 60 parishes the rates 
paid by the railway are more than half the total assess- 
ment. In 166 parishes the land of the railway is rated at 
from £23 to £345 an acre, the rest of the land being rated 
from 9s. 6d. to £8 8s. an acre. The controversies over the 
ratings in the larger towns are often very expensive and 
inconclusive. Professional valuers have in some cases 
bargained with the authorities for a commission on what- 
ever increase in the assessment they may establish, an ar- 
rangement that obviously impairs the weight of their evi- 
dence. The whole matter seems to be in as deplorable a 
state of confusion in England as in this country, and it 
should obviously be regulated by a central authority, having 
power to assess net earnings and to apportion the proceeds 
of the tax thereon among the localities according to a 



THE ECONOMIC METHOD 309 

fixed principle; or having power at least to equalize 
assessments. 

We cannot here examine the details of the methods 
adopted in the different states in dealing with this diffi- 
culty, but attention should be directed to an ingenious 
compromise which is practicable when the property of 
a monopoly lies within a single taxing district. The South 
Metropolitan Gas Company of London has for a long time 
operated under such a system, its charges for gas and its 
dividends being inversely proportioned. Whenever the 
company reduces the price of gas one penny per thousand 
feet, its standard dividend may be raised one farthing, or 
five shillings per cent. The shares of the consumers and 
of the stockholders are stated to be about as thirty-five to 
six. Hence if the assessment of the company is increased 
too much, the consumers pay six-sevenths of the excess. 
Probably no better system of dealing with public service 
companies operating within the limits of municipalities 
can be devised, and where it has been introduced in this 
country the results seem to have been satisfactory. The 
plan has the advantage of calling the attention of the 
consumer to the fact that special taxation imposed on the 
company may enhance the price of the commodity fur- 
nished. So far as the company is concerned, it makes little 
difference whether it pays a higher tax and charges more 
for its product, or pays a lower tax and charges a smaller 
price. To the individual consumer the difference may be 
material. He may consume little gas, but pay a large tax 
on his property, and he is thus interested rather in having 
taxes lower than gas cheaper. Hence it may seem more 
equitable, within certain limits, to increase the tax as the 
dividend increases, rather than to lower the price of gas. 



310 THE METHODS OF TAXATION 

Such a tax is collected with very little expense, and when 
first imposed might conform to the progressive as well 
as to the economic method. 

This illustration brings us face to face with the great 
question whether it is desirable to tax transportation, or 
the physical transfer of persons and things. Strong argu- 
ments can be advanced in support of the proposition that 
no such taxation should be imposed. All the property of 
railroad companies might be exempted from taxation, while 
the rates charged might be fixed so as to bring the owners 
only a reasonable return on their investment. To the 
objection that this would be to confer a favor on those 
whose goods are transported, the answer is that whatever 
saving in freight might be thus caused would be substan- 
tially a reduction in the cost of producing goods, and 
would thus benefit the whole body of consumers. But this 
answer is not so conclusive in the case of passengers. 
Much travel is to be classed as luxurious expenditure, and 
to diminish its cost to the persons who indulge in it, at 
the expense of the public, would be unjust. It is true that 
many foreign municipalities carry on transportation and 
other functions on this principle; they own their own 
roads or plants, and serve the public at lower rates than 
would be necessary if they paid taxes. But what the 
passengers save must be made up in some way; either the 
passengers must pay higher taxes, or other people must, 
and it seems reasonable, since the passengers must pay 
a part of the cost of their transportation, that they should 
pay the whole of it. In this country, where municipali- 
ties have not to any great extent engaged in trade, it is 
probable that public opinion would condemn a proposal 
to exempt the business of transportation from taxation by 



THE ECONOMIC METHOD 311 

exempting property employed in that business. Nor are 
the fiscal advantages of such a policy so clear as to en- 
courage the belief that public opinion on this point could 
be changed. 

We may therefore assume that railroad property is to 
be taxed; and, if it is earning only a reasonable profit, 
its taxes cannot be increased without an increase in the 
charges for its service. Otherwise new capital could not 
be obtained for extensions and improvements needed in 
the business of the country. Now the fiscal advantages 
of a tax on transportation are very great, and the ad- 
vantages of a surtax are even greater, because the cost 
to the treasury of collecting a large sum is no more than 
that of collecting a small one. So far as passengers are 
concerned, the tax is collected at the very moment of con- 
sumption, so to speak; the passenger pays as he goes, 
and it costs the railroad company no more to collect a 
high fare than a low one. The tax, too, may be progres- 
sive. The English government, as has been noted, taxes 
the receipts from passengers paying the higher fares ; but 
the tax being on gross receipts, third class travel has been 
much favored, somewhat to the loss of the treasury. Were 
it not for the complication introduced through the reduc- 
tion of fares to such passengers as ride for short distances 
daily, taxation of this kind would have few disadvantages. 
Two conditions are extremely favorable; fares are as a 
rule proportioned to distance traveled, and human beings 
are not classified, except to an insignificant extent. In 
our practice, the rates charged for luxurious travel are 
relatively low; they might be raised by taxation without 
increasing the number of classes of passengers. Were the 
several states to agree upon uniform laws, a large revenue 



312 THE METHODS OF TAXATION 

might be derived from this traffic at a very small expense, 
and without serious injustice. 

Part of the cost of carrying passengers may be paid 
now in some cases out of receipts from carrying freight, 
and vice versa; but such inequalities must in practice be 
disregarded. Merchandise and men are totally different 
commodities. Their transportation involves different prin- 
ciples and requires different methods. Passenger fares 
are on the whole to be classified as expense, like other 
disbursements for direct personal consumption. Freight 
charges are more properly treated as elements in cost of 
production. Passengers we scarcely need to classify at 
all ; of freight the number of classes is infinite, and neces- 
sarily so. Charges for carrying freight are not, and cannot 
be, proportioned to distance; there are a hundred other 
elements in the problem. Things differ in value, in bulk, 
in weight, in fragility, in durability, in composition, in 
a hundred respects; who can measure the difference in 
the cost of transporting a carload of dynamite and a 
carload of butter? It is altogether beyond human power 
to apportion the expense of terminal facilities, for ex- 
ample, among hundreds of different commodities, carried 
different distances, many of which may never reach a 
terminal at all. The course of traffic is often such that 
many cars after being unloaded must be sent back empty 
unless they are filled with goods carried at extremely low 
rates. It costs little more to haul loaded than empty cars ; 
if they are hauled empty, the cost must be made up by 
higher charges on the freight that is carried. As a rule 
it costs less to transport goods by water than by land. 
When a railroad extends between two points between which 
water transportation takes place, the railroad must carry 



THE ECONOMIC METHOD 313 

at as low rates as the vessel, or not at all. It may be able 
to carry the freight at these low rates if it charges high 
rates to places between the competing points; and if it 
does not obtain those high rates, it may be impossible for 
it to operate. The very small profit from the competitive 
freight must be made up for by larger profit from the 
non-competitive freight; but this small profit may make 
all the difference between prosperity and ruin. Com- 
plaints, often violent complaints, will be heard from the 
interior towns ; superficially they seem to be discriminated 
against unjustly. But the fact may be that without such 
apparent discrimination these towns could have no rail- 
road service at all. Their location, not the policy of the 
railroad, discriminates against them. 

The system of charges for carrying freight has been 
developed with enormous labor. It has taxed the ingenu- 
ity of the ablest men, and it is perhaps surprising that 
they have been able to attain success at all. The mechan- 
ism is so prodigiously complicated as to make it almost 
impossible to calculate what will be the result of changing 
a single rate. No general principles can be applied, no 
theories are found to work. The existing body of rules 
is a growth, the product of innumerable forces, the result 
perhaps as much of chance as of design. Chaotic and 
irrational as it may seem, to reconstruct it would revolu- 
tionize trade. It would destroy the prosperity of many 
towns, it would ruin many enterprises, and it cannot be 
said that any other system has been devised that promises 
much improvement. Not only must the interests of in- 
dividuals be regarded, but the rivalries of cities, the jeal- 
ousies of states, the intricacies of foreign trade and foreign 
commercial policies. Were the commerce of the coun- 



314 THE METHODS OF TAXATION 

try wholly under the control of , the general government, 
it is perhaps conceivable that some plan for its equitable 
taxation might be conceived. As it is, there seems to be 
little reason to think that the governments of the several 
states could be induced to agree upon uniform laws, even 
if they were capable of framing them. The conclusion 
appears unavoidable that any attempt to tax the trans- 
portation of goods is likely to cause so much injustice as 
to outweigh its obvious fiscal advantages. The taxes now 
imposed on railroad property are, it must be admitted, 
taxes on transportation, but they have perhaps become a 
recognized element in cost of production, and with a 
rational system of assessment they might be made to meet 
the requirements of the fiscal method. 

The main conclusions on this subject may be briefly re- 
stated. Assuming that more than ordinary profits are 
obtained by an individual or a company exercising a 
monopoly unprotected by legislative contract, these profits 
may be reduced in two ways. The thing or service fur- 
nished by the monopoly may be of such a kind that its 
price can be lowered by law to a reasonable figure. Or, 
both in such a case, and when prices cannot be fixed by 
statute, the property owned by the monopoly may be as- 
sessed at a rate corresponding with its value as indicated 
by the profit that can be made from it. In both cases, what 
may be regarded as an unearned value is taken from the 
owners of the monopoly and distributed, in the former 
instance, among the consumers of the product affected; 
in the latter, among the whole body of taxpayers. The 
latter course seems more equitable, as involving no dis- 
crimination in favor of a particular class of consumers; 
yet the power to fix charges must be held in reserve by 



THE ECONOMIC METHOD 315 

the government, even if not actually exercised. If the 
latter course is adopted, the monopoly may be taxed either 
on its net receipts, a process that implies some valuation 
of its investment of capital; or on this investment, in 
assessing which the net receipts above operating expenses 
should be taken into account. Owing to the imperfect 
manner in which the accounts of companies rendering 
public service have been frequently kept in the past, it 
is impossible to determine the amount of their investments, 
and justice seems on the whole more likely to be attained 
by adopting some principle of assessment based on the 
experience of many companies and communities in their 
struggles to assign a definite meaning to the term net 
receipts. 

It must be added that all reasonings and conclusions 
concerning monopoly are so speculative as to have little 
practical value. This is because monopoly value is found 
everywhere and in every degree. It implies some differ- 
ential advantages, and such advantages are not only num- 
berless but also extremely variable and sensitive to changed 
conditions. Property in land is not intrinsically of the 
nature of monopoly, for much land produces no rent. But 
property in a certain piece of land may have a monopoly 
value, and we should, strictly speaking, treat every one 
of the millions of pieces of land owned by our citizens 
and bearing rent as a distinct monopoly. In a broad sense 
they are all in competition with one another, and their 
value is constantly fluctuating. The same is true of other 
monopolies. They cannot be classified; every one must 
be considered by itself. There is no such thing as a 
complete monopoly. The general government assumes to 
monopolize the transportation of letters; it prosecutes 



316 THE METHODS OF TAXATION 

those who would compete with it. But even this monopoly 
is very imperfect. The express companies, the telegraph 
and telephone companies, limit it. A patent right is ap- 
parently as complete a monopoly as can exist; but many 
things may be substituted for a thing that is patented. 
Electricity competes with gas, and oil with both. Cisterns, 
springs, and artesian wells compete with water companies. 
Carriages drawn by horses or propelled by electricity com- 
pete with tramways, and all compete with railways, and 
so do sailing vessels and steamships, which compete also 
with each other. The monopoly supposed to be enjoyed 
by one railway may be far less complete than that of an- 
other. The New York Central railway has many com- 
petitors among railways, and it has besides a formidable 
competitor in the Erie canal, for the maintenance of which 
it is itself heavily taxed. This competition between en- 
terprises carrying on the same business, together with the 
competition of enterprises offering substituted services, 
makes the situation of every monopoly different from 
that of every other. To institute a comparison between 
two great railroad systems, if the result is to have any 
scientific value, necessitates investigation of the most labo- 
rious character, and requires so much time that when the 
later stages of the inquiry have been reached the earlier 
ones have already become obsolete. The attempt to tax 
monopolies, therefore, must produce a great deal of in- 
equality, and it involves so much expense for investiga- 
tion as to make it a very questionable expedient from the 
point of view of the fiscal method. 

We have so far confined our attention to companies 
owning chiefly real estate and tangible personalty of a 
durable nature. But many companies and individuals 



THE ECONOMIC METHOD 317 

own little real estate, their wealth consisting almost en- 
tirely of personal property, either tangible or intangible, 
while a large class owns intangible property almost ex- 
clusively. Merchants often carry on business in rented 
stores, and as a rule perhaps their holdings of real prop- 
erty are relatively small. They are, under modern con- 
ditions, both debtors and creditors on a large scale. A 
mercantile concern may have a shop piled full of goods 
in which its ownership is very limited. They may not 
even have been bought, but are to be sold on commission ; 
and even if they have been bought they may not have been 
paid for, and will not be, until they are sold. Even then 
payment is not made in money but in promises, and the 
banks are called on to cash these promises. But they cash 
them for the most part by the use of other promises, either 
their own or those of the government; either by credits 
or by currency. Hence it is a matter of no little diffi- 
culty for a mercantile company to know just how much 
it is worth. To determine this accurately, it would have 
to know just how much numerous other concerns are worth, 
all of whom would labor under similar difficulties. 

Under these circumstances it is evident that the assessor 
can form little idea of the amount of property owned by 
a trader. He is obliged to be governed largely by indi- 
cations that are liable to be deceptive, and that are often 
intentionally made so. He must fall back on the method 
of disclosure, of the evils of which enough has been said. 
Many merchants would not dare to make a true statement 
of their condition to the tax-gatherer; it would some- 
times put it in his power to ruin them. Many do not 
choose to make such statements, because they know that 
their enemies in trade will not make them, and they are 



318 METHODS OF TAXATION 

not inclined to pay their enemies' taxes by increasing their 
own. In considering the general property tax we have 
already remarked the evanescent nature of merchandise. 
Much of it is produced and consumed before it can be 
assessed, and it is in constant motion, accelerated often 
by the approach of the period of assessment. Such prop- 
erty can be taxed only by guessing at its average amount, 
year by year, with such aid as the owner chooses to afford. 
It is obvious that all manner of injustice may be perpe- 
trated when such taxation is imposed, and as most of the 
monopolies in trade are maintained by the policy of the 
government, to tax them seems unreasonable. Such other 
monopolies as exist may be presumed to owe their success 
to the ability of their managers, and to burden them is not 
likely to benefit the community. In view of these facts, 
and of the expense and annoyance involved in the process, 
the taxation of personal property employed in trade seems 
not compatible with the fiscal method, and in some com- 
paratively enlightened communities it is not attempted. 
Were it carried out, the burden would not remain on the 
owners of such property, but would be diffused throughout 
the community; and it seems impracticable to confine the 
burden to unearned values, their amount being quite 
indeterminate. 

" The case of persons and companies owning and dealing 
in intangible property as a business has been extremely 
complicated by legislation. In a primitive state, barter 
is facilitated by the use of the precious metals. Promises 
to pay would not have been acceptable, because the judicial 
machinery for enforcing such promises had not been de- 
veloped. But it was discovered long ago that a very great 
saving could be made, if promises to pay could be sub- 



THE ECONOMIC METHOD 319 

stituted for actual payment in coin, and the governments 
of the world, after innumerable more or less successful 
attempts to defraud their subjects, have now established 
tolerably stable and honest systems of credit currency. 
Modern barter, however, is conducted on such a colossal 
scale as to require far greater facilities than these systems 
provide, and the development of our credit system has 
brought into existence a great number of institutions whose 
office it is to trade in claims or evidences of indebtedness 
of every description. Such institutions may be called 
generically banks, and that term may be conveniently ap- 
plied to individuals as well as corporations dealing in what 
is called money, but which would perhaps better be called 
credit. 

It is true that all the countless millions of promises to 
pay outstanding at any moment are ultimately solvable 
in the precious metals ; but, paradoxically enough, men do 
not desire such payment unless they fear that they cannot 
get it. The possibility of this demand, however, makes it 
necessary for the banks to keep such a quantity of coin 
on hand as experience has shown to be necessary to meet 
it, and to that extent bankers are owners of tangible prop- 
erty. But this is an incident of their business which needs 
not here be considered; the property of a bank consists 
essentially in its ownership of credits or claims for the 
payment of money, and its profits are made by acquiring 
such claims and transferring and issuing them. Owing 
to a misunderstanding of this fact, which has even at the 
present day not been dispelled, legislatures have imposed 
many conditions that have operated injuriously. To the 
unreflecting mind, wealth means money, and the ordinary 
legislator is prone to regard an issue of promises to pay 



320 METHODS OF TAXATION 

as a creation of capital. It seems obvious enough now, 
although it required a long and bitter experience on the 
part of the colonies, to say nothing of that of the general 
government, to disclose it, that a promise to pay has little 
value unless the promisor has the means of performance. 
Yet even after the states were prohibited by the constitu- 
tion from issuing bills of credit, they persisted up to the 
time of the Civil War in granting charters practically 
authorizing this practice, and these charters were fre- 
quently issued to very irresponsible parties. 

There seems no particular reason why anybody should 
not sell his promise to pay coin if he can find a customer 
for it, and there is little doubt that if the government 
had not interfered, the bankers of the country would have 
developed a sound and scientific currency system. But 
this was prevented by the action of government in monopo- 
lizing this right, or in granting it as a privilege to those 
whom it favored. And owing to the misunderstanding 
above referred to, the supervision of the issue of notes or 
bills of credit, rendered necessary by the policy of the 
government, was extended to banks of discount, or the 
banking business proper. If the business of issuing notes 
payable to bearer as a substitute for coin was to be monopo- 
lized, it may have been proper enough for the government 
to provide that those exercising the monopoly should fur- 
nish security for the payment of their notes. In the 
numberless transactions of daily life, there is no time to 
investigate the solvency of those whose paper is employed 
as currency, and the conditions that prevailed before the 
national system was established were such as to make that 
system appear like a transition from barbarism to civi- 
lization. But there was no reason for extending the 



THE ECONOMIC METHOD 321 

monopoly to the banking business proper. The solvency 
of a bank concerns only its depositors and stockholders, 
and had it not been for governmental interference, ex- 
ercised by legislators frequently dishonest and almost 
always ignorant, the bankers of the country would have 
established rules that would have protected the commun- 
ity against unscrupulous speculators. The ablest and most 
successful men in a community usually direct its banks, 
and by their achievements in maintaining our vast struc- 
ture of credit in times of panic they have repeatedly proved 
their capacity. The severity of these crises is aggravated 
by the conditions created by the banking laws; but by 
combinations unrecognized by law the bankers have over- 
come many of these obstacles. 

These observations are, however, rather beside the mark. 
We have to deal with the taxation of banks, and must 
assume that they will continue to be conducted under the 
existing laws. The general government grants the privi- 
lege of issuing notes to corporations that will deposit its 
bonds as security, and imposes a tax on the exercise of 
the privilege. Such a tax cannot be peculiarly burden- 
some to these corporations. Unless the men who organized 
them were satisfied that the investment would be profit- 
able they would not engage in it. They make allowance 
for taxation, as they make allowance for rent and for 
clerk hire. The tax therefore falls on the use of that 
peculiar contrivance, the substitution of paper for coin. 
Whatever saving is thus attained would enure to the com- 
munity, were the use of the contrivance free. Its re- 
striction gives it a monopoly value, which it is certainly 
proper for the government to appropriate. Were there 
an unlimited supply of government bonds, the restriction 

21 



322 METHODS OF TAXATION 

would be less severe, but it would still exist, and the value 
created by it is a value to which the whole community 
is entitled. Owing to the exact form in which the ac- 
counts of national banks are necessarily kept, a tax on 
their notes is collected with little expense and with no 
opportunity for evasion. Such a tax might be made to 
conform in every respect to the requirements of the fiscal 
method. 

The taxation of the banks of discount, which are to a 
great extent corporations organized under state laws, pre- 
sents more difficult problems. Their property, as repre- 
sented by their authorized capital stock and surplus, is 
usually subject to assessment at the place where their 
business is carried on, and there is thus no uniformity in 
the rate of taxation. Where it is made uniform, it may 
bear little relation to the earning power of the bank, and 
it is not always practicable to ascertain the market value 
of the stock. Dealings in such stock are comparatively 
infrequent, and the quotations of its price are not con- 
clusive evidence of its value. But whatever method of 
taxation is adopted, it cannot be maintained that it will 
constitute a peculiar burden on those who invest their 
money in the business. Trade cannot be carried on with- 
out borrowing, and the rate of interest is controlled by 
the relation between the supply of capital and the demand 
for it. Whatever makes it more difficult to furnish the 
supply tends to raise the rate of interest. This in turn 
tends to check demand and thus to restrict trade. A tax 
on banking is a tax on borrowing, and as trade is now 
carried on by means of credit, such a tax must be dif- 
fused throughout the industrial world. Were there no 
such tax, doubtless many banks would be organized in 



THE ECONOMIC METHOD 323 

places where they do not now exist, to the great advantage 
of the trade of those places. It would also be to the ad- 
vantage of the whole country, for the lack of banking 
facilities compels the use of great quantities of currency, 
to supply which sometimes causes a good deal of embar- 
rassment. Were all taxes taken off the business of banking, 
all other business would be benefited; and after a short 
time, competition would bring down the profits of bankers 
to a normal level. 

Apart from legislative restraints, banking is not the 
subject of monopoly, and even chartered banks must feel 
the competition of other money lenders. When there is 
but one bank in a town, it may be able to obtain some- 
what higher rates for its loans than it would if there were 
several, but this advantage is not very great. If very 
high rates were obtained, competitors would soon learn 
it, and endeavor to share the abnormal gain, and borrowers 
would go away to get their paper discounted. It is true 
that an old bank with much capital enjoys a kind of 
monopoly. Its prestige, or good will, may be an asset 
of very great value. But it seems inequitable to lay a 
special tax on a monopoly of this kind, which is the result 
of ability of a high order applied to the promotion of 
trade. The successful management, which gives the pres- 
tige, means that thousands, perhaps millions, of loans have 
been prudently made, and that as many depositors have 
been honorably repaid. The enhanced value which a 
property so managed acquires cannot be said to be un- 
earned; even if the men who created the value have 
passed away, it seems for the public interest that others 
should be encouraged to follow their policy. So far as 
the good will of a bank appears in the valuation of its 



324 METHODS OF TAXATION 

stock, it is taxed when the stock is taxed, and it would 
be difficult to devise any other way of reaching an asset 
of such a fleeting and perishable nature. 

Were a scientific system of taxing banks established, 
it might recommend itself as a fiscal measure. It would 
not require self assessment, and while it would be a burden 
on trade, it would be very generally diffused, and might 
perhaps violate no principle of justice. Ko such system 
now exists, and the methods and rates of assessment vary 
greatly in different states and localities. As is shown in 
the appendix, the most outrageous inequality has prevailed 
in assessing the banks of Chicago, and similar inequality 
is everywhere to be found. Nor is it easy to avoid. The 
assets of a bank are constantly changing, and it is difficult 
to assign them a precise value. Nor does this value meas- 
ure the profits of the bank. The simplest plan would be 
to tax the dividends that it made, and attempt no other 
taxation of stockholders. There is, unfortunately, little 
probability that such a tax would commend itself to our 
legislatures. In spite of the obvious usefulness of banks, 
they are a favorite object of denunciation by demagogues, 
and much ignorance and prejudice have been displayed in 
the legislative regulation of their functions. 

Savings banks are often forbidden to engage in banking, 
and where this restriction prevails, they are simply invest- 
ing agencies. As they are not carried on for the profit of 
stockholders, any taxes levied on them fall directly on their 
depositors. To some extent the banks may shift the tax 
upon borrowers, by demanding higher rates of interest; 
and they may be enabled to buy securities at lower prices. 
In this way the tax would be generally diffused ; but, owing 
to the character of the depositors in these banks, they would 



THE ECONOMIC METHOD 325 

probably pay a large part of it. This is because their 
opportunities for investment are limited; many of them 
would not know what to do with their money if they could 
not put it in the savings bank, and they might bear a heavy 
tax rather than withdraw it. It seems oppressive to exact 
such a tax from persons in this situation, and it is the 
policy of some of our states to encourage thrift among the 
poor by exempting their savings. Complaint is heard that 
rich people take advantage of this exemption. But were 
it abolished they would find other ways of investing their 
money so as to escape double taxation. As with taxes on 
other corporations, the cost of collection is small ; and the 
burden is equally distributed. It is not on fiscal grounds 
that the tax is objectionable. 

Life insurance companies resemble savings banks in 
many respects. They are properly investing companies, 
organized for the benefit of those who wish to provide for 
their families ; although when they have a capital stock, it 
sometimes becomes very valuable, and the mutual owner- 
ship plan seems more consistent with the purpose of such 
institutions. As the holders of their policies are not of 
the poorer class, these companies are usually taxed, and 
sometimes at very high rates. In the State of New York 
the tax amounts to one-fourth of the payments to bene- 
ficiaries. Such a tax is evidently paid by the policy 
holders, and it tends to be diffused, as in the case of the 
tax on savings banks. It is easily collected, but of ques- 
tionable wisdom. Fire insurance companies are more 
commonly organized for the profit of their stockholders; 
but, as already explained, the burden of the tax upon them 
falls on the policy holders, and thus raises the cost of fire 
insurance. As the practice of insuring against loss by fire 



326 METHODS OF TAXATION 

is universal, the policy of making it more expensive is open 
to question. Some attempt has been made to limit the 
amount of business done by life insurance companies, on 
the ground that the great funds controlled by some of 
them constitute a kind of monopoly; and they are forbid- 
den to invest in certain securities. How far regulations of 
this nature are for the benefit of the community is a matter 
on which opinions differ. 

Allusion has been made to two taxes recently imposed 
in the State of New York, one a tax on transfers of title to 
shares of stock in corporations, the other a tax on mort- 
gages. The former tax violates every principle of justice. 
It is levied on the face value of stock, and is therefore 
grossly unequal. Two stocks may have the same face 
value, but one of them may sell at 20, the other at 200. To 
transfer one of them will involve the payment of a tax 
ten times as heavy as when the other is transferred. When- 
ever the stock is sold, the tax is repeated, and it may be 
levied a hundred times in a year on the same property. 
The tax requires self-assessment, and it is a misdemeanor 
to evade it. Nevertheless it can often be, and it often is, 
evaded. The legislature has endeavored to prevent evasion 
by requiring dealers to open their accounts for inspec- 
tion by the tax-gatherers, but the courts have declared 
this proceeding unconstitutional. Such a tax puts a pre- 
mium on dishonesty, and is to be condemned on every 
ground. It no doubt brings in a large revenue, and it is 
defended as a tax on gambling. But to tax all transfers 
of title because some transfers are made by speculators is a 
travesty of justice. It is a reversion to barbarism. 

The tax on mortgages stands on a somewhat different 
footing. For a long time mortgages were nominally taxed 



THE ECONOMIC METHOD 327 

at their face value, but the exemptions were numberless and 
evasion was universal. Finally, as a compromise, the tax 
was reduced to a low figure, and made payable when the 
mortgage is recorded. The tax is equal in so far as it is 
proportioned to the amount of the mortgage, but unequal 
in that it is not proportioned to the time for which the 
mortgage runs. It is unequal, too, because it falls on those 
who have occasion to borrow on the security of their land, 
and not on those having no such need. It is obviously a tax 
on land, because it renders trading in land more expensive ; 
and on this ground the mortgages taken by companies 
formed for the acquisition of homes by cooperation are 
exempted. But the rate is so moderate as to have no per- 
ceptible effect on land values, and the expense of collec- 
tion ought to be extremely small. If it is thought desirable 
to tax transfers of title to land at all, the present tax is 
perhaps as satisfactory as any that could be devised, and 
as such transfers are relatively infrequent the occasional 
inequality may be disregarded. Under our system of title 
by public record, little inequality through evasion of the 
tax can arise. 

This review indicates the limitations of the fiscal 
method. On the one hand justice forbids the resort to self- 
assessment, and on this account both the general property 
tax and the income tax must be rejected. License taxes 
are objectionable because they are unequal. They fall 
heaviest on men of small capital, and few of them produce 
revenue enough to compensate for the vexation which they 
cause. The great taxes on the production of spirits, beer, 
and tobacco, seem to have become part of the natural order 
of things, although many persons now living remember 
when they did not exist. So long as public opinion regards 



328 METHODS OF TAXATION 

them as sumptuary taxes, they will probably be retained. 
They are certainly very productive of revenue, and while 
they offend against some of the principles of the fiscal 
method, it seems hopeless at present to try to dispense with 
them. Some of the progressive taxes can be collected with 
moderate expense ; if the progressive principle is admitted 
to be just, not much objection can be raised on fiscal 
grounds to high taxes on large legacies, and a graduated 
tax on house rents has very exceptional recommendations. 
With these exceptions, the fiscal method rejects all attempts 
to ascertain the wealth, or the ability to bear taxation, of 
the individual. What are known as stamp taxes are usually 
taxes on transfers of title, and are almost necessarily un- 
equal. They may have fiscal advantages, but such advan- 
tages are not sufficient to overcome this objection. Taxes 
on corporations as such are taxes on the machinery of trade ; 
they diminish the economic gain which the corporation is 
created to secure, and seem to be therefore irrational as 
well as burdensome. Taxes on monopolies are in most 
cases repugnant to the governmental policy which creates 
and favors monopolies, and are in other cases of uncertain 
fiscal merit. Public opinion certainly does not demand 
that the monopoly value of lands held by individual owners 
should be confiscated by the legislature through special 
taxation. Whether it is fiscally desirable, if practicable, 
to expropriate the owners of this value when represented 
in public service corporations, and in what manner, are 
questions concerning which public opinion is still un- 
formed. In general, companies engaged in trade, in bank- 
ing, in insurance, etc., are subject to so much competition 
as- to make it vain to attempt to tax them as monopolies ; 
and, while there are apparently fiscal advantages in taxing 



THE ECONOMIC METHOD 329 

them, the burdens of the community may be thereby even- 
tually increased to an extent that will neutralize the fiscal 
gain. 

It thus appears that a number of taxes may comply with 
the chief requirement of the fiscal method, inexpensive- 
ness of collection ; but there is danger of a fallacy of com- 
position. Taken by itself every one of these taxes may be 
satisfactory, but taken together they may require a multi- 
plication of taxing officers, and a needless amount of book- 
keeping by taxpayers. If it should appear practicable to 
obtain the required revenue by means of a few of these 
taxes, or even by a single tax, the gross expense of collec- 
tion might be materially reduced. In order to ascertain 
this, we need to consider with care what elements make 
up the cost of collection; and as this cost is of peculiar 
importance in the case of that large class of taxes known 
as customs duties, it will be convenient to examine them 
at the same time. 



CHAPTER X 

THE COST OF COLLECTING TAXES 

The amount of a tax is properly the amount finally 
deducted from the wealth of the community, including 
not only the money actually paid over to the tax-gatherer, 
but also all the disbursements of the taxpayer, whether 
they be in the shape of the payment of money, or loss of 
time, or trouble or vexation of any kind. This part of the 
cost of collecting taxes never appears in the reports or 
statistical tables of the public treasury, nor has it received 
very much attention from economists. Adam Smith, with 
his usual comprehensiveness of treatment, showed its im- 
portance; and many other writers have pointed out that 
certain taxes may take out of the pockets of the people 
much more than they bring in to the treasury. How this 
comes to pass has been partly explained under the head of 
the diffusion of taxes, the general principle being that a 
tax falling on what are called raw materials tends to in- 
crease by more than its amount the cost of finished goods. 
This element of cost is so striking as perhaps to have 
caused the others to be disregarded; and their nature is 
such as to make it very difficult to estimate their amount 
accurately. This difficulty, however, should not be al- 
lowed to preclude all attempts at such an estimate. 

To avoid circumlocution, we shall speak of the disburse- 
ments of the government in obtaining revenue as the cost 
of collecting, and the disbursements and expenses of the 
taxpayers as the cost of paying taxes; the sum of these 



THE COST OF COLLECTING TAXES 331 

costs expressing the total cost of the taxing process. The 
cost of collection may be first examined. As has been said, 
the government reports throw no light on the cost of paying 
taxes, and unfortunately, they are of little value in ascer- 
taining the cost of collecting them. They do not state the 
cost that they profess to state, but only a portion of it. 
As a part of its machinery of collection, the general gov- 
ernment has spent enormous sums in constructing public 
buildings, post offices, custom houses, etc., all of which are 
exempt from taxation. Under a proper system of book- 
keeping, these disbursements should appear in a capital 
account, and the cost of maintenance, including a proper 
allowance for local taxes, should appear as an operating 
expense. !No such accounts are exhibited when the govern- 
ment reports the cost of collecting its revenue. To judge 
from these reports, the costly structures where customs are 
collected have no existence, and of course cost nothing to 
maintain. 

When the government rents a building for a post office, 
the rent appears as a disbursement, and out of the rent the 
owner pays the local taxes. When it builds its own office, 
always at a great, and usually at an unnecessary expense, 
the charge for rent disappears. Apparently the government 
is carrying on its business more economically than before; 
really the expenses have increased and sometimes very 
greatly increased. The city where the building is located 
is poorer through the loss of the tax formerly paid, 1 and 
the whole community is poorer through the sinking of 
a part of its capital on which no interest is charged, and 
through an increase in the cost of maintaining the public 

1 Although the buildings occupied by the British government are 
not rated, the government assumes some of the expense of the district 
where the buildings are situated, by contributing to the rates. 



332 METHODS OF TAXATION 

service. The post office always reports a large deficiency. 
If its accounts were kept as those of every sound corpora- 
tion should be kept, this deficiency would be very greatly 
increased. 

The reports of the cost of collecting customs duties are 
equally incorrect. They include the salaries and wages 
of employees and little else. They do not include expendi- 
tures for consulships, for revenue cutters, for fuel, lights, 
water, furniture, janitors, etc., for buildings owned by 
the government, 1 nor any interest charge, nor the cost of 
new buildings. They include no disbursements at Wash- 
ington, although the expenses of the treasury there are 
admitted to be some four millions, and would be twice 
that, if account were kept of capital there expended. Ac- 
cording to the statement of the government, its cost of 
collection is from three to five per cent of the duties 
received; the expense of collection not increasing in pro- 
portion to the volume of imports. It is perhaps not un- 
reasonable to suppose that the true cost is double what is 
stated. To determine it accurately would require an ex- 
amination of a large part of the accounts of the government 
for many years past; but the size of the annual appro- 
priations for public buildings is notorious, and it is easy to 
calculate that the interest charge for such investments 
would reach an enormous figure. Similar criticisms apply 
to the statement of the cost of collecting the internal rev- 
enue. This statement includes almost nothing except dis- 
bursements for salaries and wages. The expenses of this 
department are much less than in that of the customs ; but 
they are much larger than they are admitted to be. 

1 The appropriations for wages and salaries for this account run up 
to nearly $2,000,000. 



THE COST OF COLLECTING TAXES 333 

The cost of paying taxes is illustrated in the process of 
meeting the requirements of the government when goods 
are imported from foreign lands. The importer is put to 
some expense before the transportation of his goods begins, 
as the preparation of invoices and the determination of 
market values is not a simple matter. When the goods 
arrive, only experts can comply with the necessary for- 
malities, and a large number of customs brokers are con- 
stantly engaged in assisting importers in clearing their 
goods, a service which is by no means gratuitous. 1 It might 
be supposed that when a tariff has been in force for a dozen 
years it must be thoroughly understood. As a matter of 
fact the disputes over duties seem to be endless, and they 
occupy the time not only of the customs officers, but of the 
lawyers and experts paid by the importers. During the 
fiscal year of 1907 the Board of Appraisers settled protests 
in 87,631 cases. It would probably be a gross under- 
estimate to suppose the cost of each case to average only 
ten dollars; but even then the total cost would be nearly 
a million, and at a hundred dollars a case it would be 
nearly as much as what the government declares to be 
the cost of the customs service. In every case, samples 
must be taken, packages opened, fees paid, errors atoned 
for. Duties paid by mistake on a larger quantity of goods 
than is actually imported cannot be recovered. There is 
no appeal to the collector, for such appeals lie only in the 
case of imported goods, and the goods in question were not 

1 Every railway car entering this country requires a certain paper 
manifest, the cost of which is incalculably small. But the collectors 
of customs sell these forms to the railways at ten cents a piece. In 
some districts the collectors are supposed to pocket as much as 
$30,000 a year in this way. This is not a cost of collecting taxes; 
it is a cost of paying them. 



334 METHODS OF TAXATION 

imported. Nor is anything gained by appealing to the 
Department, for when the money has been covered into 
the treasury it will not be refunded. And a very little 
delay in protesting or applying for re-appraisement is fatal 
to the proceeding. 

In view of the hundreds and even thousands of classes 
of goods recognized by the tariff and the commentaries 
upon it, it might seem that no doubt could exist as to the 
proper classification of any article of merchandise. There 
could be no greater mistake. The disputes over classifica- 
tion seem rather to increase than diminish, and there is 
no prospect of their terminating. This is partly because 
new things are constantly invented, and new combinations 
of old things made. In order to meet the demands of the 
protective system, all sorts of materials must be taxed not 
only in their most simple forms, but also in their com- 
posite forms. There must be a tax on jute, on cotton, on 
wool, on silk, on mohair, etc. But a fabric may be woven 
of all these substances, and of varying proportions of them, 
and how shall it be taxed? In fact the number of new 
fabrics is constantly increasing, and novelties appear in 
every department of manufacture. 

Sugar may seem a simple substance ; but there are many 
different kinds of sirups and sugars, having different quali- 
ties and values, and they are subjected to many different 
processes. To determine how imported sugar should be 
taxed, not long since caused such violent disputes in Con- 
gress as nearly wrecked a tariff bill, and came near wreck- 
ing an administration. To lay a tax on sugar is to disturb 
a hundred industries, situated all over the world. It may 
seem surprising that we eat jam made in Dundee, where 
neither fruit nor sugar are indigenous. We do so because 



THE COST OF COLLECTING TAXES 335 

the governments of Europe adopted a policy of taxing their 
subjects which had the result of supplying sugar to the 
Scottish manufacturers at less than cost. We may perhaps 
cease to eat this jam, for now the government of England 
has adopted the policy of taxing its subjects on the sugar 
that they import, in order to benefit the West Indian 
planters. 1 Nothing is more misleading than to apply 
a class name to a number of things that have important 
differences. Beet sugar differs from cane sugar, and the 
sugar of Java differs much from that of Cuba. The sugar 
at the top of a hogshead differs in quality from that at the 
bottom, and under most tariffs would be dutiable at a differ- 
ent rate. The government is now suing the American 
Sugar Refining Company on the ground that for many 
years it has not paid the proper duties on its imports. 
When every bag and hogshead of sugar has to be weighed, 
and should be scientifically sampled, it would not be sur- 
prising if in testing so many millions of packages there 
should be a vast number of errors. 

The difficulty of determining the cost of paying taxes 
on sugar is increased by the policy of protection. A num- 
ber of years ago the planters of Hawaii succeeded in hav- 
ing their product exempted from duty, and this product 
now amounts to over 700 million pounds. The planters 
of Porto Rico more recently obtained this favor, and their 
product has risen from an insignificant quantity to over 
400 million pounds. The planters of the Philippines have 
been less favored, paying three-fourths of the full duty, 
while those of Cuba pay four-fifths of it. The planters of 
Louisiana and the domestic producers of beet sugar of 

1 The customs officers even claim that certain leathers shall pay a 
duty on the sugar that is used in treating them. 



336 METHODS OF TAXATION 

course pay no duty. Out of a total consumption of about 
6,400 million pounds, some 1,130 million pounds pay the 
full duty, and about 2,850 million pounds pay a part of 
it. The duties amount to some $52,000,000, and the 
bounties in the shape of exemption and reduction are prob- 
ably not much less. The duties themselves vary from less 
than a cent a pound on inferior sugars to nearly two cents 
on the highest grades. The greater part of the imported 
sugars are supposed to pay a duty of about one cent and 
two-thirds a pound. Probably the tropical countries could 
produce all the sugar consumed here for two cents a pound. 
The cost of refining is a notoriously litigated subject. It 
may be one-eighth, or one-fourth, or possibly one-half a 
cent a pound. Consumers, however, pay some six cents 
a pound for their sugar; which, on a moderate estimate, 
is perhaps nearly twice what they would pay were all 
duties abolished, and is certainly one-half more. They 
pay, to the planters and the government together perhaps 
$100,000,000 ; but what part of this is due to protection 
and what part to taxation proper it is impossible to deter- 
mine. In this discussion we have assumed the policy of 
protection to be established; but granting all that is 
claimed for it, it can hardly be doubted that the cost of 
paying taxes on sugar is more than the amount of the 
taxes themselves. The cost of collecting these taxes there- 
fore must be far less than the cost of paying them. 

Most people would perhaps regard wheat as a simple 
substance. In fact there are many species of wheat, and 
many grades of the same species. There are spring wheats 
and winter wheats, and the latter are grown in many widely 
separated regions, under different conditions, and the same 
grade may vary much in quality according as it is shipped 



THE COST OF COLLECTING TAXES 337 

from Galveston or from "New York. If there are such 
differences in the case of grain, they must obviously be 
much greater in the case of manufactured goods. It is 
impossible to lay specific duties upon them without the 
grossest inequality. To do so would often be to prohibit 
the importation of the cheaper grades of a commodity. 
Hence it is necessary to resort to ad valorem duties, under 
which all the evils of self-assessment arise. In order to 
check undervaluation the government employs spies 
abroad, and rewards inspectors with a part of the moneys 
which their zeal, so stimulated, may justly or unjustly 
obtain as penalties. The whole system reeks with inequal- 
ity and fraud. It has all the evils of the taxes on intan- 
gible personalty, and produces the same results on the 
morals of merchants. The methods of undervaluation, to 
say nothing of actual smuggling, are infinite in number, 
and it is notorious that reputable importers in certain lines 
of trade have been driven out of business by unscrupulous 
competitors. 1 

Moreover, in spite of the constitutional provision for 
uniform duties, the cost of paying taxes varies much at 
different ports of entry. At Boston, the importer must 
claim his goods and pay the duties within two days of the 
vessel's discharge, failing which the goods are sent to a 

1 Cobden, speaking in Parliament in 1853, said he remembered being 
in the Chamber of Commerce in Manchester when a deputation from the 
dealers in tobacco and snuff came in to complain of adulteration caused 
by high taxes. "The gentlemen who were the largest dealers and man- 
ufacturers said to us most frankly, after exposing all the different arti- 
cles with which tobacco was colored and adulterated, such as the beard 
from malt, peat moss, and things of that kind, 'There is not a man in 
this neighborhood who carries on the tobacco and snuff trade without 
illegal adulteration except Mr. Read,' a gentleman who was then pres- 
ent, but who has since left the trade and who although not less than forty 
years of age, went to Cambridge and is now in holy orders." 



338 METHODS OF TAXATION 

bonded warehouse, at a cost of fifty cents a package for the 
first month, and twenty-five cents thereafter. The charge 
is the same for a keg of fish worth five dollars, or an auto- 
mobile worth five thousand. Under this general order 
system at Boston, goods that would be stored elsewhere for 
five cents a month pay ten times that amount to the gov- 
ernment, or to a favored contractor, while in New York, 
where the charge is now by weight, the burden is much 
lighter. The truth is that it is impossible to tax merchan- 
dise with any approach to justice, either by local assess- 
ment or by customs duties. Specific duties necessarily dis- 
criminate against the cheaper grades of any commodity; 
ad valorem duties necessarily encourage dishonesty. The 
customs were established in barbarous times, and are a 
relic of barbarism. Unfortunately, they are intimately 
connected with the excise. Spirits and tobacco cannot be 
taxed for inland revenue unless taxed when imported ; and 
if a single import is taxed, all the other imports, and even 
travelers' baggage, must be inspected to prevent smuggling. 
The English duties are the most scientific of any, but 
owing to the high rates imposed on spirits and tobacco, 
these articles are often concealed among other goods, and 
the cost of collecting a few duties may thus be not much 
less than if there were many ; although the cost of paying 
duties is much diminished. 

On such a subject as this, conclusions must be largely 
conjectural ; but the evidence seems sufficient to prove that 
the cost of collecting duties may be as much as ten per 
cent of the amount collected. The cost of paying them, 
exclusive of the enhanced price to consumers, may be as 
much more. We can form some idea of the extent to which 
price may be enhanced from the figures concerning sugar ; 



THE COST OF COLLECTING TAXES 339 

we know that it can be bought abroad, raw, for a little 
more than two cents a pound, and that our people pay 
about six cents for it when refined. We know, too, that this 
tax is relatively much more burdensome to the poor than 
to the rich, and it must require great faith in the doctrine 
of protection to make such a tax seem desirable. But such 
faith unquestionably prevails, and on this account it is 
not worth while to quote the elaborate computations of such 
writers as David A. Wells, Thomas G. Shearman, and Ed- 
ward Atkinson. As estimated by them, the enhanced 
prices caused by our customs duties amount to far more 
than the duties themselves; but the subject is too contro- 
versial to be here considered. Nevertheless the most zeal- 
ous believer in protective duties cannot deny that they 
enhance prices; for that is their avowed purpose. And, 
whether imposed for protection or for revenue, when they 
fall on materials that are subjected to many processes after 
importation, or that are instruments of production, they 
must often greatly increase the price paid by the final con- 
sumer. Some sugar is used in certain processes of manu- 
facture, and as an instrument of production ; but the great 
bulk of it, when refined, passes directly into consumption. 
We know how greatly the price of sugar is nevertheless 
enhanced, and we may properly infer that the prices of 
goods manufactured from imported materials, especially 
when imported machinery is used, must be enhanced in a 
greater degree. 

This examination proves that the cost of paying and 
collecting taxes, although commonly neglected, is a factor 
of transcendent importance in the problem of taxation. 
The aggregate injustice caused by making the process need- 
lessly expensive is enormous. Many taxes must be con- 



340 METHODS OF TAXATION 

demned because they offend against justice in other ways ; 
but more are to be rejected because they offend in this 
way. We are thus brought face to face with the question 
whether there is any tax, or any system of taxes, that 
offends in neither way. Such taxation must not depend on 
self-assessment, and it must fall only on property that is 
visible and tangible. It must not be laid on movable or 
evanescent property, but only on what is durable and open 
to the inspection of the public as well as of the assessor. 
The value of the property too, should be notorious, or 
easily ascertainable, not only that few assessors may be 
paid, but also that their judgments may be open to 
correction. While it is desirable that the property taxed 
should be in universal use, in order that the tax may seem 
proportionate, it will also be advantageous if it has some 
monopoly value, in order not to offend against the pro- 
gressive principle. And, finally, the payment of the tax 
should be so simple a matter as not to compel the taxpayer 
to employ expert assistance, or to waste time in complying 
with vexatious formalities. 

A tax on real property, proportioned to the rental value 
of every separate parcel, seems to comply very perfectly 
with all these requirements. Land is permanent and im- 
movable. It cannot be concealed, and its value can be 
ascertained by inspection. The owner needs not be com- 
pelled to disclose it, for others can estimate it nearly as well 
as he. Every one owns or hires some land. He uses it for 
the extraction of materials, for the production of food, for 
making and storing goods, or for his own shelter. If the 
ore or the grain obtained from a piece of ground is valu- 
able, that value is reflected in the price of the land. If the 
goods kept on the land are of great value, the value of the 



THE COST OF COLLECTING TAXES 341 

land is enhanced. If its possession enables the occupant 
to carry on a very profitable business, this profit will com- 
pel him to pay a high rent. The poor man must content 
himself with cheap shelter, erected on cheap land. The 
rich man will indulge in costly shelter, and his rent will 
correspond with his circumstances. The expense of collect- 
ing the tax on real property is very small; it is caused 
chiefly by the labor of assessment. The expense of paying 
the tax, provided the assessment has been properly made, 
is insignificant; it may amount to no more than the cost 
of a few postage stamps, expended once a year. 

Many tracts of land produce no rent, and if any taxes 
are laid on such land, they must be merely nominal. Most 
parcels of land have a value due either to the labor of the 
owner and of those from whom he derives title, or to the 
growth of population, the existence of valuable minerals or 
properties of soil, the construction of roads, etc. This 
latter value is distinguished as unearned, or public value. 
In theory, it would be most just to confine taxation to this 
value. Practically, as has been explained above, this would 
not be true, because it would involve a revolutionary 
change in the constitution of the industrial world, and 
because it would be a task of enormous difficulty to dis- 
tinguish earned from unearned value. No doubt this 
attempt is made under some of our systems of assessment. 
The assessors assign a certain value to the land, and a 
certain value to the improvements thereon. 1 It often hap- 
pens that men buy land on which buildings are standing, 
intending to destroy and replace them. In such cases, 



1 Of course, it is easy enough to do this. As has been said in Eng- 
land, a professional valuator will put a value on anything, if he is paid 
for it. The scientific value of these valuations is questionable. 



342 METHODS OF TAXATION 

perhaps, a definite value can be assigned to the land ; but 
this is because the value of the existing improvements has 
become relatively so small as to be negligible. The same 
thing takes place when agricultural land becomes available 
for building sites. The labor expended in fertilizing the 
soil is disregarded, being swallowed up in the new value. 
Nevertheless, we cannot ignore the fact that this labor has 
been expended, and has become embodied in the land ; the 
new value would be greater did it not involve the destruc- 
tion of the old. On the whole, it seems that justice will be 
better attained by continuing the existing system of taxing 
every parcel of real estate as a unit, basing the assessment 
on its rental value. 

This conclusion is strengthened when we reflect that 
such a tax falls progressively on the unearned, or public 
value. As a rule, costly buildings are erected only on 
costly land. In some parts of New York City it would 
perhaps be impracticable to construct a building that 
should have the value of its site. Hence a tax on the land 
and building together falls in great part on the public 
value of the land ; it is levied more on the monopoly value 
than on the earned value. It is admitted that a tax on rent 
proper cannot be shifted ; it must be paid by the landlord. 
To a certain extent, therefore, the existing tax on real 
estate falls on landlords as a class, and the obstacles in the 
way of going further in this direction are very great. It 
would not be easy to overcome them in the cities. In the 
country it might be impossible. 

In so far as this tax falls on improvements, as we have 
seen, it tends to be diffused ; but it is diffused throughout 
the community. If buildings are heavily taxed, building 
will be expensive; but it will be proportioned to the de- 



THE COST OF COLLECTING TAXES 343 

mand. Men must have shops and houses, and they must 
therefore pay such a price for them as will cause them to 
be built. And, as has been observed, where buildings cost 
more, any diminution in the demand for them tends to 
diminish the value of land. In some degree, therefore, a 
tax on buildings falls on rent proper. To attempt to throw 
the whole burden on rent would certainly increase very 
much the cost of collecting the tax. Rent represents a dif- 
ferential advantage, and to assess such advantages with 
accuracy would require a very high order of ability and 
integrity in the officers charged with that duty. Their 
task is already very difficult, and their assessments are to 
a considerable extent conjectural. The inequalities now 
prevailing cause many protests; were they increased, the 
injustice might become serious. 

Not many persons, perhaps, are aware how small is the 
cost of collecting this tax. The assessor of the City of 
Glasgow reports the cost of valuing real property in that 
city at only £2,000 a year. All premises are surveyed 
annually, from door to door, the names of owners and occu- 
pants taken, and the rent paid, when the premises are let. 
At the same time schedules are issued to all owners, requir- 
ing them to give the names of their tenants and the rents 
paid. These schedules are compared with and corrected 
by the results of the survey. The rental value of premises 
occupied by the owner is usually ascertained by compari- 
son with similar rented premises. After the valuation 
roll has been made up, every owner or occupier is served 
with a notice of his assessment, the number being about 
180,000. Appeal lies to the surveyor, and from him to 
the town council, and finally to two judges of the Court of 
Session. In the year for which this report was made, there 



344 METHODS OF TAXATION 

were no appeals to this Court; those to the town council 
are usually from 80 to 100. This valuation roll is always 
accepted without question by the Board of Inland Revenue 
in levying the income tax. The permanent staff of the 
assessors' office is only 34, but at times the number rises to 
100. The small cost of valuation is partly explained by 
the fact that this staff performs many other duties, the 
cost of which is not a part of the expense of assessment. 

The cost of valuation in London and the Metropolitan 
district is, partly because rates are levied by both County 
and Parochial authorities, materially larger, being esti- 
mated at from £25,000 to £40,000. As the amount of 
taxes collected in the year when this estimate was made 
was about £12,000,000, the cost was moderate enough. It 
may cause surprise to learn that this cost is quite mod- 
erate in the City of New York. The department of taxes 
and assessments in that city is carried on for a little over 
$400,000. The total valuation of the land in 1907 was 
$6,240,000,000 and the number of parcels assessed was 
over 483,000, making the cost per parcel little more than 
80 cents. This department assesses personal property 
also, a process that involves much labor. Were this charge 
deducted, it would considerably reduce the cost of assess- 
ing the land. In the City of Philadelphia the number 
of parcels assessed is 350,000, the cost of the Tax De- 
partment being about $187,000. In Baltimore this cost 
is reported to be $33,800; the number of parcels being 
120,000. 

It is true that these figures require to be raised. They 
apparently include no charge for office rent and several 
other expenses, and it is probable that they do not include 
a proper charge for receiving and apportioning the pro- 



THE COST OF COLLECTING TAXES 345 

ceeds of taxation, or for the expenses of litigation. But 
even if the figures were doubled, the result would com- 
pare very favorably with the cost of collecting customs 
duties. That cost may well be ten per cent, while the 
cost of collecting nearly one hundred million dollars from 
the owners of real estate in the City of New York, espe- 
cially if we deduct the expense of the tax on personalty, 
can hardly be so much as one per cent. Nor is the cost 
of paying this tax at all burdensome. There are com- 
paratively few disputes concerning assessments, and while 
the expense of litigation is considerable, it is probably 
much less than in the case of customs duties. 

It cannot be denied that the part of the tax on real 
estate that falls on improvements, such as factories, shops, 
stations, etc., is a tax on the instruments of production, 
and thus increases the cost of products to the consumer. 
This fact constitutes a strong argument for exempting 
improvements, and confining the tax to rent. The ad- 
vantage, however, is probably more theoretical than prac- 
tical. The cost of distinguishing the different elements 
of value, and that of settling the disputes that the at- 
tempt to distinguish them would occasion, would perhaps 
more than equal the expected gain. In spite of the reason- 
ings of economists, the opinions of experts, the reports 
of numerous commissions, and the complaints of thousands 
of outraged citizens, it seems to be almost impossible to 
induce legislators to abolish taxes on intangible personalty. 
The popular conviction is very strong that it is unjust 
to exempt the property of a rich man from taxation, no 
matter what the nature of his property may be. It would 
probably be equally strong as to the injustice of exempt- 
ing the shop of a rich merchant, or the factory of a large 



346 METHODS OF TAXATION 

firm or corporation. The community would no doubt gain 
through such exemption, as it gains through every de- 
crease in cost of production; but at. least it may be said 
that the loss from taxation of this kind is distributed 
equitably. What the actual loss may be seems altogether 
indeterminable. That it is less than might be supposed, 
may perhaps be inferred from the experience of numerous 
concerns whose property has been exempted from taxa- 
tion for a term of years, under the statutes of some of 
our states. The prosperity of these concerns has perhaps 
seldom been so great as to prove that this exemption has 
been very advantageous, and if it has not been of great 
advantage to them, it cannot have been to the community. 
And, it may be repeated, if a factory is to be taxed, those 
who propose to build it cannot pay so much for the rent 
of a site as they otherwise could, so that a part of the 
tax may be thrown back on the landlords. 

In his classical report on the reform of taxation in the 
State of New York, rendered in 1871, Mr. Wells pro- 
posed to tax personal property employed in trade. He 
was well aware of the strength of the prejudice against 
exempting any form of property from taxation, and his 
suggestion was in the nature of a compromise. It was 
based on the principle that the rental value of buildings 
is a sign of the value of the personal property of the 
occupants, and was in the form of an alternative. Either 
the land might be taxed separately at one-half its market 
value, and the building at its full value as shown by its 
rent; or the land and building might be taxed jointly at 
their market value, while the occupant should also be 
taxed, as the putative owner of personal property to the 
amount of three times the rental value of the premises. 



THE COST OF COLLECTING TAXES 347 

At the time of this report, real estate was commonly as- 
sessed at not more than half its value, and it was deemed 
expedient to recognize the practice. The assumption that 
the occupant of a building owns personalty worth three 
times the rent that he pays, is arbitrary. It may be true 
on the average of men engaged in trade, so far as their 
factories and shops are concerned; but it could be true 
of the occupants of dwellings only if their incomes were 
reckoned as property. No doubt, with such a system of 
taxation, more revenue would have been derived from 
personal property than under the general property tax, 
and a great deal of injustice would have been corrected. 
Nevertheless it is economically unwise to tax capital em- 
ployed in production, as the consumers of final products 
may have to pay more than the tax in enhanced prices; 
and for the reasons about to be stated, the desired end 
can be obtained through a measure based on a distinction 
of really fundamental importance. 

For dwelling-houses are not to be classed with other 
buildings. The distinction may seem unreasonable, but 
it exists, and it would cause great confusion to disregard 
it. To a great extent it is certainly true that a man 
thinks of his house as an expense. When he builds a 
shop or a factory, he calculates what profit he can make 
out of it. When he builds a house he calculates how much 
of the income derived from the business carried on in other 
buildings he can afford to expend in house rent. No doubt 
house building and house renting are trades. The builders 
and the owners of tenement houses regard them not as 
sources of expense, but of profit ; but that is not the view 
of the occupants. No doubt, too, we may treat man as 
a producing machine, requiring food and shelter, just as 



348 METHODS OF TAXATION 

a steam engine requires fuel and protection against the 
weather. But that would be to turn economics upside 
down ; it would be as perplexing as adding a fourth dimen- 
sion to space. It seems proper therefore to treat house 
rent as belonging with expense and not with income, and 
to regard a tax on house rent as an income tax. 

The real estate tax, therefore, comprises a tax on un- 
earned or public value, a tax on buildings used as instru- 
ments of production, and a tax on expense ; although these 
taxes are often inextricably mingled. The last tax, as 
has been shown, has very great fiscal advantages. It can 
be collected with the same machinery as the ordinary real 
estate tax — although this is not done in England — and 
at no additional expense. It accomplishes the purpose 
of the income tax, with none of its evils. It can be made 
progressive, and in that event tends to fall on rent. It 
can be avoided, but it will be avoided only by those who 
do not feel able to pay it, or by the parsimonious, whose 
savings are necessarily poured into the great reservoir of 
capital from which all business is supplied, and whom it 
is therefore advantageous to exempt from taxation, just 
as it is advantageous to exempt any productive agency. 
Eor, it must be repeated, the opportunities of the poor 
are limited, not by the accumulations of the rich,, but by 
their extravagance. The rich man who spends little, neces- 
sarily invests his income. He pays laborers and supports 
industries. He expends a part of his income for food 
and clothing and house rent; the rest goes to other men 
who are thereby enabled not only to pay for food and 
clothing and house rent, but who also create food and 
clothing and houses of a greater value than what they 
consume. It can seldom be disadvantageous to the com- 



THE COST OF COLLECTING TAXES 349 

munity to tax extravagance and waste; it must always 
be injurious, although it may be unavoidable, to tax pru- 
dence and frugality. 

We have not in this country the necessary materials 
for estimating the amount of house rent. It is otherwise 
in England, and the returns for the inhabited house duty 
are instructive. This tax is not levied on buildings used 
in trade, unless they are also used as dwellings; nor does 
it fall on houses renting for less than £20 a year. The 
total number of premises is about 8,300,000, the number 
exempt being about 6,500,000, of an annual value of over 
£104,000,000, and the number charged being more than 
1,800,000, of a value of some £90,000,000. Of the 
premises charged, those renting from £20 to £41 number 
about 1,230,000, and those renting from £41 to £80 about 
390,000. Between £80 and £100, the number is about 
60,000; between £100 and £150, about 70,000; between 
£150 and £200 some 27,000; and between £200 and 
£300, about 22,000. The number of premises renting for 
more than £300 falls off rapidly; between £300 and £400 
it is less than 9,000 ; between £400 and £500, a little over 
4,000; between £500 and £600, under 2,300; between 
£600 and £700, about 1,500 ; between £700 and £1,000, 
about 1,800; and over £1,000 it was in 1903-04 the 
same. The rate of duty on premises of an annual value 
between £20 and £60 rises from two pence in the pound 
to six pence; beyond that the rate is not increased. It 
may be remarked that the rental of premises in the metrop- 
olis is one-third of the total for the country, and that the 
rental of those worth over £600 is two-thirds the total for 
premises of that class. 

This duty is to a considerable extent degressive; the 



350 METHODS OF TAXATION 

annual value of exempt premises being more than that of 
those taxed; and the value of those partly exempt being 
nearly £50,000,000. The value of those between £60 and 
£100 is some £11,500,000; of those over £1,000 it is 
about £3,750,000. What is somewhat surprising, in view 
of the heavy taxation recently imposed on the rich, the 
number of premises renting for more than £500 continues 
to increase nearly as rapidly as before. The assessment 
of this tax should occasion very little expense ; all houses 
are assessed to the rates, and one assessment ought to suffice 
for all purposes. In view of the enormous cost, both in 
money and vexation, of the income tax, and of its viola- 
tion of the principles of justice, the house duty might 
very well be substituted for it. Much of the so-called in- 
come tax is already derived from land, and from taxes 
on permanent investments, and can be collected without 
resorting to self-assessment. Its effect has been to depre- 
ciate the values of these investments, and little injustice 
would now be caused by retaining it. The amount of the 
income tax proper is not so large that it could not be 
replaced by increasing the house duty. Leaving houses 
renting for less than £20 exempt, there would remain 
nearly £100,000,000 of rental value, which could very well 
be taxed at ten per cent. The charge to the community 
would be no greater than before ; and probably it would be 
greater in the case of only a few individuals, except in 
so far as the progressive feature was extended. On the 
other hand, the saving in expense would probably far more 
than make up for the abatements and repayments that 
now complicate the system. It would be practicable — 
although not fiscally desirable — to extend the duty to 
premises used for trade, the rental value of which is of 



THE COST OF COLLECTING TAXES 351 

course in such a country as England very great. Such 
premises are already in effect taxed through the tax on 
the profits of their occupants; were this tax removed, a 
corresponding one on rental values would be no additional 
burden to trade, and the change would remove a prolific 
source of discontent and dishonesty. 

It is evident that for the proper assessment of such a 
tax, or of any tax on real estate, there must be established 
principles of valuation, applied by men of experience. 
In England land is rented more commonly than in this 
country, and it is probable that information concerning 
the terms of leases is more easily obtained than here. In 
the City of New York it is the practice of the assessors 
to iix the value of the land in a somewhat arbitrary man- 
ner, and" to estimate the cost of replacing whatever build- 
ings may be standing thereon, due allowance being made 
for the fitness of the building for its site, and for depre- 
ciation. In England the allowance for this account and 
for repairs may be as much as twenty per cent, but no 
such rule seems to obtain here. In New York, after the 
land is valued at a certain rate per front foot — which 
rate may prevail for a whole block, or may change with 
every lot, — the number of square feet is calculated, and 
then the number of square feet of floor surface. Frame 
dwellings and factories, it is assumed, may be replaced at 
a cost of from $1 to $3 per foot of floor surface ; ordinary 
brick dwellings for $3 to $5 ; modern office buildings and 
hotels from $3.50 to $8; and very costly buildings for as 
much as $10. In making these valuations the assessors 
are guided by reported sales, by mortgages, by leases, and 
by whatever knowledge they may be able to procure. They 
are not elective officers, but hold their positions by a secure 



352 METHODS OF TAXATION 

tenure. They could hardly accomplish their work if their 
term of office were short and uncertain, as is commonly 
the case in other communities. 

Were this system of valuation supplemented by a prop- 
erly constituted court for hearing appeals from the judg- 
ments of the assessors, as near an approach to justice as 
is practicable would perhaps be attained. Value is es- 
sentially uncertain and indefinite. It means the price 
which will be paid for a thing by a purchaser; but pur- 
chasers differ in their estimates, in their knowledge, in 
their needs, and in their means. All that an assessor can 
do is to learn what prices are commonly paid, and to 
compare similar properties. He may never be quite 
accurate in his judgment; but if competent, he should 
never be very far wrong. If his assessment of a par- 
ticular parcel is too high, the aggrieved taxpayer should 
have prompt and cheap relief by appeal; if too low, the 
owners of adjacent property should have similar relief. 
And, whatever the imperfections of such a system, they 
seem to be less than in any other that human ingenuity 
has contrived. 

It is probably true that land owners, as a class, would 
view with alarm any proposal that seemed likely to in- 
crease their burdens. Yet if taxes are shifted and diffused, 
it can scarcely be denied that nearly all the charges levied 
on personal property and on trade fall eventually on land, 
and with enormously increased weight. Were these taxes 
abolished, the value of land would inevitably be increased. 
The larger profits would impel men to make larger in- 
vestments, and enable them to pay higher rents. The vast 
saving in the cost of collecting taxes by the existing methods 
would constitute a fund that would be divided among all 



THE COST OF COLLECTING TAXES 353 

the members of the community, the landlords included; 
and the share of the landlords might well be far more than 
would compensate them for their increased taxes. It 
must not be forgotten that the exemption of personal prop- 
erty is no untried experiment. Such exemption, so far 
as local taxation is concerned, has long prevailed to a 
great extent in Pennsylvania, and certainly few states 
have enjoyed greater prosperity. It has practically, though 
not legally, prevailed in many other communities; in the 
City of Buffalo, for example, personal property forms only 
2.1 per cent of the total assessment. 

To increase suddenly the burden on land, if the increase 
were considerable, would certainly be unjust. The gov- 
ernment is estopped by its prolonged recognition of the 
rights of landlords, and their expectations of secure pos- 
session are reasonable. But justice does not seem to de- 
mand that speculative and prospective values shall be 
protected; it is only when the action of government di- 
minishes the present market value of land that it can be 
called unjust. Furthermore, the negative decrease of 
value, as it may be called, caused by securing to the pub- 
lic the future increment, can injure no one. It is only 
the present owners of land that can suffer from a new 
tax upon it; the claims of heirs and devisees being, so 
to speak, latent in the present ownership. After the 
tax is imposed the market value of the land is reduced; 
a purchaser computes the profit to be made from using the 
land, reckoning the tax as an expense, and pays a corre- 
spondingly lower price. The tax is therefore no burden 
on him, nor on any subsequent purchaser. They cannot 
complain of the injustice of a burden which already lay 
on the property when they bought it, which they assumed 

23 



354 METHODS OF TAXATION 

with full knowledge of its weight, and which was in effect 
extinguished in the reduction of the purchase price. 1 

The reasons above given make it probable that land 
owners would in several ways be more than recompensed 
for the apparent increase of their taxes. But, whether 
this be true or not, it is certain that not only they, but 
the whole people might be relieved of a heavy burden by 
a very simple reform. There are at present three bodies 
of tax-gatherers, — the collectors employed by the coun- 
ties, cities, towns and smaller taxing districts; those of 
the states; and those of the general government. It is 
perhaps common to assume that, as every governing body 
requires revenue, it should have its own force of collectors ; 
but this assumption does not bear examination. Provided 
the necessary amount of revenue can be raised by one sys- 
tem of taxes and one body of officers, the presumption is 
in favor of its being so raised. In order to understand 
why this simple system has not prevailed, a brief retrospect 
is necessary. 

Curiously enough, an attempt was made to apply it in 
part at the time of the separation of the colonies from the 
mother country. The Articles of Confederation provided 
that taxes were to be apportioned among the states " in 
proportion to the value of all land within each state 
granted to or surveyed for any person, as such land and 
the buildings and improvements thereon shall be estimated, 
according to such mode as the United States in Congress 
assembled shall from time to time direct and appoint," 
the taxes for paying that proportion to be laid and levied 
by the state legislatures. The feebleness of the state gov- 
ernments, and their jealousies, rendered this and all other 

1 See Appendix C. 



THE COST OF COLLECTING TAXES 355 

measures for obtaining revenue by taxation nugatory, and 
the Congress was compelled to resort to foreign loans, and 
to the miserable expedient of issuing paper money to which 
a forced currency was legally given. When the Consti- 
tution was adopted, this principle was abandoned, for 
reasons which it is unnecessary to detail, and instead it 
was provided that direct taxes, as well as representatives, 
should be apportioned among the states according to 
population. 

But as wealth was not then, and has never since been, 
proportioned to population, direct taxes have been seldom 
laid by the general government, and when laid have aroused 
so much opposition as to have been unproductive of reve- 
nue. For similar reasons excise taxes were soon given 
up, and not renewed until the emergency of the civil war. 
The general government began at once to rely on customs 
duties, and until that time this was practically its only 
source of revenue. 

For many years the state governments were carried on 
with very little expense, and the principle stated in the 
Articles of Confederation was generally recognized, a small 
surtax for state purposes being added to the taxes levied 
by the local authorities, and this surtax was collected by 
the same tax-gatherers. Of late, however, the real or 
pretended needs of the state governments have enormously 
increased, and the amount of the surtax has become a very 
serious matter. The result has been to develop all the 
evils attendant on the method of self-assessment. As the 
basis of the state tax, the valuations of property made 
by the assessors of the minor political divisions were taken. 
The smaller the assessed valuation of the property in a 
town, therefore, the smaller the state tax; and in spite 



356 METHODS OF TAXATION 

of drastic provisions commanding assessors to list prop- 
erty at its fair market value, the pressure of local senti- 
ment was too great to be resisted. Such assessors as 
complied with the law caused heavy penalties to be laid 
on their districts, in the shape of disproportionately heavy 
state taxes. Such assessors as disregarded the law, and 
assessed property below its value, procured exemptions for 
their localities in the shape of disproportionately light 
state taxes. Assessors of the former class were unpopular, 
and were not reelected. 1 Inequalities as outrageous as 
in the case of the taxation of individuals were of common 
occurrence, and the attempts of the state authorities to 
equalize assessments were but partly successful. Under 
these circumstances the inducement to resort to indirect 
taxation, in order to secure revenue for the state, was too 
strong to be resisted, and a number of new taxes, and an 
additional force of tax-gatherers, were created. Such, in 
a general way, is the explanation of the existence of three 
practically independent systems of taxation in this coun- 
try. The tendency in this direction has of course been 
increased by the natural desire of rulers to conceal from 
their subjects the extent of their exactions, through the 
device of indirect taxes. 

When the union was formed, it would probably have 
been impossible for the general government to obtain its 
revenue by direct taxation. Its powers were not denned 
by the judicial interpretation of the Constitution, and obe- 
dience to its mandate was at first reluctantly yielded. It 
is now beyond question supreme, and little resistance seems 
likely to be offered by the state governments to any taxation 
that it decides to impose. Were the necessary amendment 

1 See Appendix A. 



THE COST OF COLLECTING TAXES 357 

to the Constitution made, it would be entirely practicable 
to raise all the revenue of the national government by 
means of a direct tax, proportioned to the revenue received 
by the state and local governments, and it would be equally 
practicable for the state governments to obtain, as they 
have in some fashion in the past, all their revenue by 
means of a direct tax, proportioned to the revenue of 
their constituent political bodies. The change above re- 
ferred to, by which this reform could be effected, is as 
simple as it would be revolutionary. It consists merely 
in applying the principle of the income tax to the case 
of municipalities. 

The chief objection to a tax imposed on the income of 
the individual is that the individual is called on to dis- 
close his income ; this process of self -assessment resulting, 
as we have seen, in the most demoralizing injustice. But 
this objection does not arise when we wish to learn the 
income of a political body. The amount of its revenue, 
as well as that of its expenditure, is a matter of public 
record, and it can always be ascertained by inspection. 
Instead of basing the state tax on the assessed valuation 
of the property owned in any municipality, the legislature 
should have based it on the municipal income; or, what 
is nearly the same thing, the municipal expenditure. To 
have done so would have extinguished all the evils whose 
existence led to the imposition of the present state taxes. 
It would have removed all inducement to assess property 
at less than it was worth; whether it was listed at its 
full value or at a nominal figure would have been a matter 
of purely local concern. 

Only in exceptional cases does the revenue of a munici- 
pality fail to indicate the wealth of its inhabitants. A 



358 METHODS OF TAXATION 

town where there is little wealth can spend little on its 
government, and its share of the state tax wonld be of 
trifling amount. A rich city maintains an expensive gov- 
ernment, and can afford to pay a large tax to the state. 
There is perhaps no more accurate measure of the ability 
of the inhabitants of a community to contribute to the 
support of the government of the state, than their ability 
to contribute to the support of the government of their 
community; and this ability is measured by the amount 
contributed. As a matter of fact, the indirect taxes now 
collected at so much expense by the state are probably 
distributed among its communities in very nearly this 
proportion. Furthermore, taxation in the manner de- 
scribed would tend to check extravagance in both state and 
local governments; the amount of the state tax would 
be brought to the attention of all taxpayers, and the legis- 
lators would, as experience has shown, dread to increase 
it. On the other hand, the local authorities, knowing 
that if they increased taxes, the state tax would increase, 
might be more prudent in their disbursements. 

The total amount of what may be called the public in- 
come in every state being thus accurately known, to levy 
a proportional surtax on this income for national purposes 
would require the employment of but a few scores, or at 
most a few hundreds, of clerks. The expense of collecting 
the national revenue in this manner would perhaps not 
be a thousandth part of what it is now; nor would the 
cost of paying taxes be diminished in a less degree. So 
great a relief from unnecessary burdens seems to be clearly 
just; and the general conclusion seems reasonable that 
taxation according to the economic method best conforms 
to the commonly accepted rules of justice. 



THE COST OF COLLECTING TAXES 359 

There is, of course, no present possibility of establish- 
ing such a system of taxation as is here suggested; those 
interested in maintaining existing abuses are too thor- 
oughly entrenched to be dislodged. Indeed, the tendency 
is now, and seems likely to be for some time to come, to 
multiply taxes, and to increase the numbers and the 
emoluments of those who derive their subsistence, directly 
or indirectly, from this source. Should this tendency be 
reversed, it would be easy to present an overwhelming 
body of proof in support of the claims of the economic 
method. But it is not the aim of this treatise to elaborate, 
or even to advocate, particular measures of taxation. Its 
aim will be attained if it shall direct attention to the de- 
plorable inconsistency between our practices in taxation 
and the rules of justice that are universally recognized. 

The air is filled with outcries against the unprincipled 
conduct of many of those who carry on the great indus- 
tries of the country. It seems strange that it does not 
occur to the authors of these complaints to ask if the 
unprincipled conduct of our rulers does not make it hard 
for upright men to carry on business at all. The evidence 
here presented shows that such men must enter the race 
with a grievous handicap; they must pay charges that 
their unscrupulous rivals do not pay. The calumnies of 
a licentious press, the malicious attacks of a despotic ex- 
ecutive, may be met by upright men with a high front; 
but how can they meet competitors whom the laws enable 
to use the weapons of evasion and deception, even of 
bribery and perjury? 

It is notorious that many charters for public service 
corporations have been corruptly obtained. It is equally 
true that without bribery they would not have been granted. 



360 METHODS OF TAXATION 

There was no dearth of men of wealth and probity who 
would have been glad to secure these franchises, could they 
have done so without soiling their hands; they did not 
care to submit proposals that would have been laughed 
at by rulers accustomed to get gain by trafficking in the 
rights of the community. Our legislators know the re- 
quirements of justice. Commission after commission has 
reported the iniquities of the present laws ; men in every 
department of industry have pleaded not to be forced to 
be dishonest, but they have pleaded in vain. Under pres- 
ent conditions scrupulous men often cannot succeed; they 
must give up their scruples or give up their business. 
Nevertheless affairs must be carried on; if not by honest 
men, then by others. As a result, the whole tone of the 
industrial world has been lowered ; that chastity of honor, 
that sensibility of principle, which will not stain itself 
by deception, is gone. Nothing would do more to elevate 
business morality than to remove the temptations to palter 
with conscience that are now confessedly overpowering. 
Nothing would be more advantageous, and nothing more 
just, than to encourage men of the highest character to 
engage in the activities from which they are excluded by 
our present systems of taxation. 



APPENDICES 



APPENDIX A 

Extract from "Taxation of Personal Property " 

By Lawson Purdy 

The labor and skill required to make a reasonably fair as- 
sessment of personal property is simply appalling; the mere 
enumeration of some of the items of personal property which 
might be owned by any prosperous citizen is a sufficient dem- 
onstration of this. The assessor might start at the taxpayer's 
residence, where he must value all the furniture, pictures, 
works of art, bric-a-brac, plate, linen, wearing apparel, books, 
jewelry, including, of course, the jewelry and wearing apparel 
actually being worn by members of the family. In order to 
make a fair valuation, the assessor must be an expert in valu- 
ing paintings, antique furniture, jewelry, carpets, and prac- 
tically have expert knowledge of every class of articles in the 
house. An ordinary man could do little more than value 
paintings by the square foot; and one picture a foot square 
might be worth $5,000, while another five feet square might 
be worth $5. One antique rug would readily sell at auction 
for $1,000 and a much larger one might be worth less than 
$100. Unless the assessor were an expert in valuing precious 
stones, he would be thousands of dollars out of the way in 
setting a value on the jewelry of hundreds of New York 
families. 

From the residence of the taxpayer the assessor might then 
go to his stable, and there he would have to be an expert in 
valuing horses, harness, and carriages, for it would not be 
difficult to make an error of several thousand dollars in valu- 
ing three or four horses. 

Let us suppose that our taxpayer is a merchant, and carries 
a large stock of goods, then the assessor's next duty would be 
to value that stock of goods. Every one knows that it would 
take the merchant's own clerks several weeks to make a cor- 
rect inventory of his stock, and they would know the actual 
prices paid for the goods, while the assessor must estimate 
their value by mere inspection. 



364 APPENDICES 

It is perfectly clear that the most skillful man could not 
possibly make a fair appraisal of even one small department 
store in a week's time. 



The System in Cities of New York 

The actual working of the system in New York is very much 
simpler than the method outlined, and the work in the old 
City of New York was all done by two or three men. As 
described by Mr. Feitner, 1 Commissioner of Taxes, the names 
of persons who are likely to be possessed of taxable personal 

1 Testimony of Hon. Thos. L. Feitner, President Department of 
Taxes and Assessments, before Mazet Committee, as reported in New 
York Sun, June 2, 1899: 

"Q. — How is the roll made up? A. — The City Directory is taken 
for the names. Inquiry is made as to location, business, etc., and any 
further information that is attainable is taken. Then the man is put on 
the books if he is taxable. It is a sort of sifting process. If a man 
swears off taxes one year he is n't put on for a year or two. 

"Q. — Do you generally accept a man's affidavit? A. — Not 
necessarily. If we know he 's all right or if his circumstances are ob- 
viously poor we do. 

"Q. — Now, doesn't the tax system as at present constituted — 
I'm not holding you responsible for it or intimating that you are in any 
way to blame — does n't it result in a lot of people who have saved up 
a couple of thousand dollars getting on the tax list while a lot of rich 
persons go unnoticed ? A. — Yes, it does. It 's a very defective sys- 
tem and works great injustice. It 's been compared to a trap that lets 
the big fish through while the little ones are caught. The great ma- 
jority of persons who pay personal taxes are worth under $10,000, and 
there are few who pay on more than $100,000." 

Mr. Harkness, former tax assessor of Brooklyn, said before the Manu- 
facturers' Association of New York, December 19, 1898 : 

" I made inquiry in regard to the way and manner they had been as- 
sessing heretofore, and they told me that they simply guessed at it. 
If a man in the manufacturing business was prosperous looking, he had 
a pretty good assessment levied upon him. If he lived in a brownstone 
house, he was assessed $10,000; if he lived in a brick house, he was as- 
sessed a little less; and if he lived in a frame house he got off for $2,000. 
Some amusing episodes came up in my experience every once in a 
while. We had a servant in a gentleman's house, a coachman, who was 
assessed for $5,000, simply because his residence was with his master. 
The whole system of personal assessments in Brooklyn — and I do not 
know that it is any different in New York — is simply absurd." 



APPENDICES 



365 



property are taken from directories, and they are assessed for 
a sum which is thought to be in keeping with their manner 
of living. Many men are placed on the rolls who have no 
property in excess of their debts, and many thousands, who 
have taxable property, escape altogether. 

The difficulty of assessing all personal property in a large 
city is proportionately much greater than in small towns. 1 In 
1903 the number of individuals, corporations, and estates who 
were assessed in the City of New York was 78,339 ; of these 
37,687 appeared before the tax commissioners and swore that 
they had no taxable property in excess of their debts, and the 
whole number taxed was 40,652. This is a very small propor- 
tion of the total population, a smaller proportion than the 
same effort would have obtained in small towns. In thirty- 
two cities of Massachusetts, with an average population of less 

1 Comparison between some large cities and small towns of New 
York, showing the percentage of personal property to the total assessed 
valuation: 



City or Tow 


n. County. 


Assessed Value 

of Personal 

Property. 

1901. 


Total Assessed 

Value of Real 

and Personal 

Property. 

1901. 


Per Cent 
of Per- 
sonal to 
Total. 


Large Crra 


s. 








Albany . . 


Albany .... 


$3,712,875 


$65,073,275 


5.7 


Buffalo . . 


. Erie 


7,522,000 


242,262,073 


3.1 


Rochester 


Monroe .... 


9,145,662 


116,448,973 


7.9 


Syracuse . 
Troy . . . 


Onondaga . . 


6,058,243 


87,143,653 


7.2 


Rensselaer . . 


3,406,137 


53,802,814 


6.3 


Small Towi 


IB. 








Friendship 


Allegany . . . 


223,168 


1,037,848 


21.5 


Olean . . 


Cattaraugus . . 


1,020,267 


4,170,157 


24.3 


Ausable 


Clinton .... 


98,800 


555,370 


17.7 


Hudson 


Columbia . . . 


1,389,880 


5,485,160 


25.9 


Kinderhook 


Columbia . . . 


529,645 


2,160,435 


24.5 


Stamford . 


Delaware . . . 


331,145 


1,080,425 


30.6 


Ashland . 


Greene .... 


55,500 


214,720 


25.8 


Lowville . 


Lewis .... 


618,600 


2,525,930 


24.8 


Geneseo 


Livingston . . 


975,050 


3,412,165 


27.4 


Otsego . . 


Otsego .... 


508,550 


2,545,525 


20.0 


Charlton . 


Saratoga . . . 


127,350 


622,999 


20.0 


Hartford . 


Washington . . 


171,980 


726,549 


23.6 


These lar 


*e cities have twenty-n 


ine times the va 


lue in real estate 


that the 


small towns 


have, but only five tin 


les the value in 


personal property 


r. 



366 



APPENDICES 



than 50,000 persons, the number taxed on personal property 
was 82,211. If the same proportion had been taxed in the 
City of New York, the number would have exceeded 180,000. 
The persons taxed in Massachusetts were put upon the assess- 
ment rolls by the same methods as those in use in New York, 
only five per cent having made sworn returns as required by 
law. These results can only be attributed to the greater ease 
of assessment in smaller places. 

When the City of New York was smaller, personal prop- 
erty paid a larger share of the tax. In 1865, personal property 
paid 35 per cent, in 1870, 29 per cent, in 1898, 21.5 per cent, 
and in 1903, 12.5 per cent of the total. Other cities of the 
state show a similar decrease in the assessment of personal 
property. 1 

A Tax on Honesty and Intelligence 

The result of this haphazard, impracticable method of rais- 
ing revenue has been serious injustice to those cities where 
tax assessors are intelligent, honest, and efficient, and enor- 
mous injustice to individuals, more ignorant or more honest 
than their neighbors. Those cities have prospered most where 
the assessors have been negligent or incapable. Tax officials 

1 A comparison between the assessed valuation of real and personal 
property in 1870 and 1901, for four counties of New York, which con- 
tain large cities : 



County. 


1901. 


1870. 


Real. 


Personal. 


Per cent 
of Per- 
sonal to 
Total. 


Real. 


Personal. 


Per 
cent of 
Per- 
sonal 

to 
Total. 


Albany . 
Erie . . . 
Monroe . 
Rensselaer 


$93,297,880 

277,307,745 

142,745,862 

72,357,516 


$5,581,950 
9,981,128 

10,929,842 
5,051,068 


05.6 
03.4 
07.1 
06.5 


$35,345,497 
41,462,863 
23,066,624 
21,720,013 


$7,669,879 

11,431,680 

2,739,692 

7,796,515 


17.0 
22.0 
10.0 
27.0 


Total . 


$585,709,003 


$31,543,988 


05.1 


$121,594,997 


$29,637,766 


19.1 



APPENDICES 367 

in this state have complained of the injustice of our tax sys- 
tem in almost every report. 1 

1 Some quotations from the reports on taxation of officers of the 
State of New York : 

Official documents tell us that, "instead of being a tax upon per- 
sonal property, it has in effect become a tax upon ignorance and hon- 
esty. That is to say, its imposition is restricted to those who are not 
informed of the means of evasion, or, knowing the means, are restricted 
by a nice sense of honor from resorting to them" (Report of Com. of 
Taxes and Assessments, City of N. Y., 1872, p. 9). 

The defects of our system are too glaring and operate too oppres- 
sively to be longer tolerated (Comptroller's Report, 1859). 

A more unequal, unjust, and partial system for taxation could not 
well be devised (First Annual Report State Assessors, 1860, p. 12). 

The burdens are so heavy and the inequalities so gross as almost to 
paralyze and dishearten the people (Assessors' R., 1873, p. 3). 

The hope of obtaining satisfactory results from the present broken, 
shattered, leaky laws is vain (Report of Com. of Taxes and Assess- 
ments, 1876, p. 52). 

The absolute inefficiency of the old and rickety statutes passed in a 
by-gone generation is patent to all (Assessors' Report, 1877, p. 5). 

The system is a farce, sham, humbug (Assessors' Report, 1879, 
p. 23). 

[The general property tax is] a reproach to the state, an outrage upon 
the people, a disgrace to the civilization of the nineteenth century, and 
worthy only of an age of mental and moral darkness and degradation, 
when the "only equal rights were those of the equal robber" (Assessors' 
Report, 1879, p. 7). 

The present result is a travesty upon our taxing system, which aims 
to be equal and just (Comptroller's Report, 1879, p. 34). 

I am still firmly of the opinion that the attempt to reach personal 
property in a general property tax should be abandoned. This has long 
since been done in practically every civilized community in the world, 
except the United States. . . . Upon no class in the community does 
the tax on personal property, as now administered, bear more inequit- 
ably than upon the farmer. . . . The tax upon personalty is therefore 
unjust as between individuals; unjust as between communities, and, as 
experience has shown the world over, it is impossible of even approxi- 
mately just administration. Then why should it be continued? (The 
Report for 1898 of Comptroller James A. Roberts.) 

Political economists are all but unanimous in insisting that an en- 
lightened system of taxation must exempt all personalty, and the tend- 
ency seems to be to embody that theory in law, as it has already come 
to obtain largely in practice (The Report for 1898 of Superintendent of 
Banks Frederick D. Kilburn). 



368 



APPENDICES 



Massachusetts Towns 

Those who are inexperienced and rely blindly upon the 
mistaken theory that to secure equality of taxation all kinds 
of property must be equally taxed, frequently claim that the 
fault is not in the law but in its administration. It is gener- 
ally conceded that the state of Massachusetts has unusually 
able and competent assessors, and that their work is per- 
formed, on the whole, better than in any other state of the 
Union, yet the proportion which the assessment of personal 
property bears to the assessed value of real estate varies 
greatly throughout the state. 1 In some towns the propor- 
tion of personalty assessed is very small, being less than five 
per cent, in 1895, of the total valuation in Eevere, Winthrop, 
Hull, and Mashpee. In a few towns it is less than ten per 
cent, and in a considerable number less than fifteen per cent 
of the total. These figures in comparison with some other 
Massachusetts towns are remarkable, for there are eight towns 
in which the assessed value of personal property exceeds the 
assessed value of realty. In Falmouth the personalty is sixty- 

1 Assessed value of real and personal property in eighteen Massa- 
chusetts cities and towns. 



City. 


Real Estate. 


Personal Estate. 


Per cent of Per- 
sonal Estate to 
Total Valua- 
tion. 


Fall River 

Lowell 

Lawrence 

New Bedford .... 

Everett 

Chelsea . 

Somerville 

Boston ....... 

Cambridge 

Springfield 

Worcester 

Town. 

Manchester 

Hopedale 

Easton 

Milton 

Lancaster 

Falmouth 

Lincoln 


841,935,800 
53,935,960 
26,669,525 
33,920,700 
13,739,100 
20,528,550 
45,224,800 

770,261,700 
67,835,100 
48,344,280 
74,953,100 

3,067,078 
838,286 
1,850,694 
7,620,350 
1,206,605 
2,216,400 
797,584 


$27,350,696 

15,965,987 

8,214,698 

22,360,417 

683,450 

2,384,544 

3,788,250 

211,008,213 

15,914,995 

13,071,811 

16,825,172 

3,740,536 
1,108,163 
2,732,017 
11,371,089 
1,807,870 
4,284,422 
1,637,335 


39.47 
22.84 
23.54 
39.73 

4.74 
10.40 

7.73 
21.51 
19.01 
21.29 
18.34 

54.96 
56.93 
59.61 
59.87 
59.97 
65.91 
67.24 



APPENDICES 369 

five per cent of the total, and in Lincoln sixty-seven per cent. 
A commission appointed to inquire into the expediency of 
revising the tax laws of the state, in their report issued in 
October, 1897, says: "The taxation of personal property in 
the form of securities and investments is thus a failure. It 
is incomplete, uncertain, not proportional to means as between 
individuals, grossly unequal in its effects in different parts of 
the state. The experience of Massachusetts in this regard is the 
same as that of the other states in the Union. Everywhere, 
without exception, the testimony is that this part of the sys- 
tem of the general property tax is unequal, unsuccessful, often 
demoralizing to tax officers, always irritating to taxpayers. 

" The experience of Massachusetts is the more striking be- 
cause here the difficulty does not lie mainly in the administra- 
tion of the tax laws. The assessors are usually honest, com- 
petent, zealous. We have heard much of grave abuses, of 
almost corrupt laxity, in other states, but in this Common- 
wealth, notwithstanding occasional defections (some of which 
we have just referred to) the standard of public duty continues 
to be high, and the cause of failure is not to be found mainly 
in official dereliction. It lies in the system itself." 

Illinois Listing System 

In the state of Illinois the statutes require personal prop- 
erty to be listed yearly according to the quantity owned on 
the first of May. Persons listing are required to make state- 
ment under oath and to deliver to the assessor an itemized 
schedule of the number, amounts, quantity, and quality of 
all taxable personal property in their possession or under their 
control. 

Eecently all attempt to obey the letter of the law was 
abandoned in Chicago, and for the tax upon personal prop- 
erty there has been substituted what is practically a gross 
revenue tax upon business. Professor Commons has described 
this extra-legal system in the Review of Reviews, February, 
1903: 

"Lists are made out for each line of business, and are sent to all the 
taxpayers appearing on the list. In addition, the Board of Review 
selects a committee of citizens from each 'line,' and submits the list to 
them for revision. This committee, being familiar with all the business 
houses, rates them all according to the amount of business and regard- 

24 



370 



APPENDICES 



less of the itemized schedules returned by each. At the present time 
there are more than 200 of these separate committees of citizens co- 
operating in the assessment machinery. The Board of Review accepts 
their ratings, but at the last assessment added 10 per cent all around, 
in order to relieve real estate that much. This method of citizen as- 
sessment has resulted in raising the valuation of personal property in 
Chicago from $21,000,000 to $88,000,000. . . Naturally, in each line, the 
stock of goods is proportionate to the amount of business, but it is 
assessed as a unit and no longer by items. The law is indeed con- 
formed to by publishing the items as returned in the schedules, but the 
additions made by the Board are entered under the item 'all other 
property/ and this item is now two-thirds of the personal property 
assessment. One notable feature of this practice is the entire elimina- 
tion of mortgages from the lists, and the almost complete elimination of 
credits. While other parts of the state and other states pay attention 
to these items, the Chicago assessors lump them all together under their 
'unit rule' of assessment." 



Name. 


Farm 
Lands. 


Town and 
City Lots. 


Total Real 
Estate. 


Personal. 


^"3 . 

§E P o 

«Ph ,- 


Cook County . . . 
Remainder of State 


$14,915,853 
300,002,192 


$282,834,401 
113,089,736 


$297,750,254 
413,091,928 


$88,109,999 
118,983,855 


22.8 
22.3 




Name. 


Watches 

and 
Clocks. 


Carriages 

and 
Wagons. 


Money. 


Credits. 




$62,202 

428,021 

1/8 


$236,249 

2,411,653 

1/10 


$2,253,282 

18,875,452 

1/9 


$5,026,746 
21,345,914 

1/5 


Remainder of State . . . 
Proportion in Cook County 


Cook County has more than 1/3 of the total real estate value of the state. 



APPENDIX B 

Taxation in Chicago 

In Chicago, in 1897, the Taxpayers' Defense League was 
organized by Mr. Z. Swift Holbrook, in order to cause the 
assessors to reduce such assessments as were higher than the 



APPENDICES 371 

average, and to raise those that were lower. The circumstances 
in Chicago are peculiar in that it is necessary to assess prop- 
erty at about one-tenth of its value in order to keep the state 
tax within proper limits. The cause of this condition has been 
explained by Mr. D. A. Wells. The constitution requires a 
certain percentage of the assessed value of property to be ap- 
plied to the payment of an old railroad debt, and unless this 
value was kept down at a very low figure, more money would 
be collected than could be applied to the designated purpose. 
But to obtain the revenue needed for local purposes the rate 
of taxation had to be raised, from time to time, until it came 
to stand at nearly ten per cent of the assessed valuation in 
the business quarters of Chicago. 

It is therefore of the utmost importance to a property 
owner that his assessment should be low; otherwise his tax 
might exceed his income. Many assessors, it seems, have 
agreed with taxpayers that their assessments should be very 
small, or nothing; and they have also levied blackmail by 
raising, or threatening to raise, assessment to confiscatory fig- 
ures. A few of the cases examined by the Taxpayers' League 
may be cited: A jewelry firm rated by Bradstreets at over 
$500,000 was assessed at $12,500. A corporation rated at 
over a million was not assessed on personal property at all; 
and one of the greatest of corporations was assessed at $60,000. 
A man rated at over half a million, who has a library worth 
$40,000, to say nothing of a yacht, and horses, carriages, and 
furniture to correspond, was rated at $200; while a poor 
woman complained that, though hardly able to afford a carpet, 
her assessment had been raised from $200 to $1,000. A large 
manufacturer, with a capital of $1,500,000, beside a surplus, 
was assessed at $3,000 on property at the store, and $2,500 
on that at the factory. A great corporation was recently cap- 
italized in a combination at $6,500,000, but was assessed the 
year following at $80,000. One of the largest wheat-brokers 
in the country, rated at several millions, was assessed at 
$2,500. One of the largest packing-houses in the world was 
not assessed at all; one of the great harvester companies at 
$47,100. A great firm in the grocery business was assessed at 
$50,000, while another of similar size was assessed $750,000. 
Agents from the assessors' office offered to have this assessment 
reduced to about $50,000 for a bribe of $5,000. Another 
dealer in the same line, rated at over $1,000,000, was assessed 



372 APPENDICES 

at $10,000 ; a rich, banker, who has spent $13,000 for a rare 
Bible, and large sums for art, was assessed at $400. One of 
the largest department stores, carrying probably $2,000,000 
worth of stock, and making a profit of $1,000,000, was 
assessed at $45,000; another, as large, was assessed at $48,- 
000; and a third, rated at $500,000, was assessed at $25,000. 
The largest house in its line of business, rated at $1,000,000, 
was assessed at $500. A brewery, rated at over $500,000, was 
assessed at $1,500. A prominent concern, being informed that 
its personal property was not assessed at all, at first denied, 
and then defended, the omission; but rather than submit to 
investigation consented to be assessed at $25,000. The list 
might be extended indefinitely, and many persons known to be 
rich are not assessed at all. The estate of one of the richest 
and most prominent merchants in Chicago was recently settled, 
and the city has claimed several millions from the estate as 
taxes on property which was not assessed while its owner was 
alive. Four prominent banks appealed to the Taxpayers' 
League on finding that their assessment was over fourteen 
per cent of their combined capital, surplus, and undivided 
profits, while many other large banks were assessed below 
seven per cent, four below four per cent, and two not at all. 

From 1873 to 1893 the assessment of personal property in 
the state fell from $287,000,000 to $140,000,000, while that 
of real estate fell from $900,000,000 to $614,000,000. In 
Cook County, which includes Chicago, the assessment of real 
estate dropped from $228,400,000 to $210,000,000; that of 
personalty from $55,000,000 to $39,880,000. The assessment 
of railroad property, however, has increased enormously. 

The report of the tax commissioners of Ohio, for 1908, com- 
menting upon the inequalities in the assessment of real estate, 
says: 

" In Adams county, of 931 pieces of real estate transferred the aver- 
age tax value is 43.4 per cent, of the sale value, while 191 pieces are on 
tax duplicate at 11.3 per cent, and 121 at 120.7 per cent, of the real 
value. In Brown county 706 pieces of real estate are on the tax dupli- 
cate at an average of 53.3 per cent, of their sale value, such average 
ranging from 12.3 per cent, to 116.6 per cent. In Monroe county, 709 
pieces are on the tax duplicate at an average of 36.7 per cent, of their 
sale value and this average ranges from 10.8 per cent, to 107.3 per cent. 
In Montgomery county 4,000 pieces are on the tax duplicate at 37.1 per 
cent, of their value and this average ranges from 12.2 per cent, to 106.9 
per cent." 



APPENDICES 373 

'APPENDIX C 

Taxation of Land 

" On principle, and as a scientific economist views it, the 
ownership of land is a monopoly given by the state for the 
purpose of cultivation, just as the concession of a railway is 
a monopoly given for the purpose of locomotion. In both 
cases a privileged opportunity is given by the state which one 
person enjoys and other persons do not — which is the source 
of profit and enjoyment to the possessor, a profit and an en- 
joyment from which all others are excluded. As a principle 
of political philosophy, no monopoly ought ever to be con- 
ceded by the state, except upon the condition for services to 
be performed, and with a right of supervision reserved. Man- 
kind in general have not been philosophers, but they have in 
most cases rudely recognized the most obvious truths of phi- 
losophy. They have done so here. Almost everywhere in the 
world the monopoly of land ownership has been burdened with 
some conditions; hardly anywhere, if anywhere, is there a 
separate ownership of land such as we now naturally think of 
it (though historically the very idea is recent and of yester- 
day) to be found, except subject to certain duties, charged 
with certain responsibilities. In England least of all has it 
ever been so. In the middle ages, when the beginnings of our 
real property law were laid, the land was subject to very for- 
midable burdens; it was the basis and foundation of our 
entire military system. It paid the " army estimates," as 
we should now speak. Gradually this condition of the priv- 
ilege was evaded by the possessors of the privilege. The land 
now pays no more for our army than the funds; a long his- 
tory has taken it from them. But the same history has 
brought other duties. For nearly three centuries the land has 
been liable for the relief of the poor. The owners of land 
have been burdened with that duty to the nation, and all land 
has been inherited and bought subject to it and with notice 
of it. It has also, in forms more or less modified, been subject 
to what we have called the mixed charges, which are partly 
for the benefit of the locality and partly for the benefit of 
the nation, and, naturally, it was always subject to improve- 



374 APPENDICES 

ment charges, which were spent on its improvement, and which 
increased its rent. The owners of the land must not there- 
fore complain of bearing national burdens; they have always 
borne national burdens, and the predecessors under whom they 
claim took the land on the condition of bearing them/' 
W. Bagehot, in Economist, 8 April, 1871. 

The Taxation of Keal Estate 

To understand the effect of a tax upon real estate it is 
necessary first to explain the incidence of a tax upon land 
and of a tax upon houses and other improvements upon land, 
for the operation of an ad valorem land tax is entirely different 
from an ad valorem tax upon improvements. 

To discover the effect of any tax the rule already given must 
be applied, that price depends upon demand and supply. If 
demand increases without any increase in supply, price rises. 
If supply increases without any increase in demand, price 
falls. If there is a perfect monopoly of an article and a price 
is arbitrarily fixed, a certain quantity of the article can be 
sold. If price is raised, a less quantity can be sold, and if price 
is reduced a larger quantity can be sold with the same expendi- 
ture of effort. 

The only way to affect price is through an increase or de- 
crease of the demand or the supply. 

If the element of speculation in land is entirely disregarded 
a tax upon land in proportion to its value has no effect upon 
the demand for land or upon the supply of land, and, con- 
sequently, such a tax has no effect upon the price of land ex- 
pressed in rent. Disregarding speculation, so long as the tax 
is not more than the entire sum which can be obtained for 
the use of land, it makes no difference in rent whether the 
tax is high or low. As such a tax cannot affect demand or 
supply, and therefore does not affect rent, it falls wholly upon 
the owner. If the owner is not the user, the tax gives him no 
power to increase the payment demanded for the use of the 
land, for the tax has no effect whatever upon the number of 
persons who desire to use it, and no effect upon the supply 
of land competing with his own. 

If the owner of land is also the user, a tax upon it, 
whether high or low, provided it is not higher than its entire 
value, gives no power to the owner to increase the price of his 



APPENDICES 375 

product. The price of products is limited by the cost of pro- 
duction upon the least desirable site, and as the least desir- 
able site has no value, there would be no tax upon it, and 
the cost of the most expensive increment would not be affected 
by the tax. This statement is merely another form of saying 
that the rent of land does not affect prices, which is so ob- 
vious a fact as not to require proof. Every one knows that 
where the value of land is greatest goods are cheapest, cheaper 
in New York, for instance, than in a country village. 

The usual illustration to explain this law is taken from 
agriculture, but it is equally true of all industries. 

So far the discussion has been based upon the supposition 
that there is no speculation in land. As a matter of fact, 
there is speculation, and consequently a tax upon land affects 
the market supply of land and therefore affects the price of 
land. In the absence of any tax, valuable land is held out 
of use at prices higher than it is worth for present use. When 
the supply is thus restricted the price of all land for rent or 
sale is increased. A tax upon land in proportion to its value, 
as it is high or low, more or less forces into use valuable land 
previously held idle in expectation of a rise in value. When 
the market supply of land is thus increased, the price of all 
land is thereby decreased. 

An important feature of ad valorem land taxation is that, 
when the rate is uniform, the tax falls wholly upon those who 
own the land at the time of the imposition of the tax. The 
selling price of land depends upon the net revenue which can 
be obtained from it, and if the net revenue is reduced by the 
imposition of a tax, the selling price falls proportionately. 
For example, the gross revenue which can be obtained from 
a certain lot or farm is $1,000. If there is no tax upon it, 
the selling price, calculated on a basis of five per cent would 
be $20,000. If there is a tax of $200 a year, the net revenue 
would be only $800, and the selling price would be $16,000. 
The owner at the time the tax is imposed would suffer a loss 
of income of $200 a year, and if he sold could only obtain a 
price based on the reduced revenue. The subsequent purchaser 
would only buy a revenue of $800 a year, and upon him the 
tax would be no burden. 



376 APPENDICES 



Summary 

When there is no speculation in land an ad valorem tax 
upon land is paid entirely by the owners, and neither increases 
the rent nor the price of land. 

When valuable land is held idle or put to an inferior use, 
being held for speculation, an ad valorem tax upon it forces 
some such land into use, the market supply is increased, the 
tax is paid entirely by the owners, and rent and price of land 
decrease. 

When an ad valorem tax upon land is imposed at a uniform 
rate it falls wholly upon present owners, and subsequent pur- 
chasers pay a price reduced by the amount of the tax capital- 
ized at the current rate of interest. 

The Taxation of Improvements on Land 

In considering the effect of a tax upon improvements on 
land, the principle already explained must be constantly borne 
in mind, namely, that price depends upon demand and supply. 

In order to ascertain the effect of the tax, we must discover 
how it will operate upon demand or supply, for in no other 
way can it have any effect at all upon the price which can be 
obtained for the use of the improvements. 

Capitalists are always on the watch for investments which 
will yield a safe and large return ; the result is that the returns 
to capital tend to be equal in all businesses in which risk is 
the same. The imposition of any charge upon a business which 
reduces the possible profit will soon restrict the investment of 
capital in that business, then the profit will tend to rise to 
the rate which can be obtained in other forms of investment 
of equal safety and convenience. \i any existing charge is 
removed from any business, or if, for any cause, the custom- 
ary returns to capital invested in that business are increased, 
new capital tends to seek investment in that business until the 
profit is again reduced to the average level. 

If a tax is imposed upon buildings and other improvements 
upon land, the investment of capital in land improvements is 
checked until the supply of such improvements is reduced in 
proportion to demand to such an extent as to raise the price 
sufficiently to yield the average return to capital. If a tax 
heretofore imposed upon buildings and other improvements is 



APPENDICES 377 

removed, capital at once seeks this investment until the sup- 
ply is so increased that the return to capital falls to the aver- 
age again. 

This is a statement of the general rule applicable to the tax- 
ation of improvements upon land, but there is another factor 
to be taken into account. We have so far considered only the 
increase and decrease of supply, but the increase and decrease 
of demand exerts an equal influence upon price and an increase 
or decrease of population directly affects the demand for the 
use of land improvements. We have, therefore, three cases to 
consider: (a) The effect of a tax upon improvements when 
population is stationary; (b) the effect of a tax upon im- 
provements when population is decreasing; (c) the effect of a 
tax upon improvements when population is increasing. 

(a) When population is stationary. If the conditions of 
population remain the same, the demand for the use of land 
improvements will be steady, and the price which can be ob- 
tained for their use can be affected only by an increase or 
decrease of supply. If a tax is imposed the return to capital 
will be decreased, but demand and supply being for the time 
constant, price will not be affected. Houses in time wear out 
and other improvements decay, so that slowly, but surely, the 
supply of improvements will diminish unless new ones are 
made, but as return to capital is decreased new improvements 
will not be made so long as the return to capital in this invest- 
ment is below the average. When, in the course of time, the 
supply has fallen to a point sufficiently low so that more than 
the usual return to capital can be derived, capital will again 
seek this investment. 

We see that when population is stationary and a tax is 
imposed upon land improvements, the tax will be paid, in the 
first instance, by the owners of the improvements, then as im- 
provements wear out the tax will gradually be shifted to those 
who hire the improvements until they are obliged to pay the 
entire amount of the tax. 

(b) When population is declining. If the decline in popu- 
lation is so rapid as to keep pace with the decrease in the sup- 
ply of the improvements due to decay, there will be no shifting 
ftf the tax from the owners to those who hire the improve- 
ments. As, proportionately to the demand, the supply will be 
constantly increasing, there can be no increase of price. 

(c) WTien population is increasing. With an increase in 



378 APPENDICES 

population there is a constant increase in the demand for land 
improvements. The tax checks the flow of capital to this in- 
vestment until the demand increases to that point at which 
the price rises so as to include the average return to capital, 
plus the tax. In this case the tax may fall for a very short 
time upon the owners of the improvements, but it is certain to 
be rapidly shifted to those who hire them and continues to 
rest upon the tenants. 

In the United States, increasing population is the rule, and 
a stationary or declining population is the exception, so that 
in general taxes upon land improvements are shifted from the 
owners to those who hire them. 

When those who hire houses use them as residences the tax 
falls upon them and can be shifted no further. 

When the tax falls upon improvements used for production, 
it adds to the cost of production and is shifted to the final 
consumers of the goods produced. Thus a tax upon all 
factory buildings falls upon all those who manufacture goods, 
and must ultimately be recovered from the purchasers of the 
goods in the same manner as any other expense of the business. 

The Eeal Estate Tax 

The effect of a tax upon real estate is the result of two 
opposing forces. We have seen that a tax upon the value of 
land not only does not increase its selling or rental value, 
but also tends to diminish the selling and rental value by in- 
ducing the owners of some unimproved land to improve or sell, 
thereby increasing the market supply of land. We have seen 
that the tax upon buildings is generally paid by the user of the 
buildings, as such a tax tends to check the erection of new 
buildings until the supply of buildings is decreased in propor- 
tion to the demand sufficiently to enable building owners to 
obtain the average rate of interest upon their investment. 

When real estate is taxed the tax falls partly upon land 
and partly upon improvements. So far as it falls upon land, 
the tendency, as we have seen, is to decrease the price which 
can be obtained for the use of land, and so far as it falls upon 
buildings the tendency is to increase the price which can be 
obtained for the use of buildings. It is impossible to de- 
termine precisely what will be the net result of a real estate 
tax in any particular place, but certain general rules may be 



APPENDICES 379 

laid down which will be found to be substantially correct. 
An increase in the tax rate is wholly paid by the owners of 
the real estate, for the effect of the increased rate put upon 
unimproved land is to induce the owners to improve or sell, 
and this effect counteracts the tendency of the increased tax 
upon buildings to check their erection, and more than counter- 
acts it. We have seen this result in the boroughs of Man- 
hattan and the Bronx, in the City of New York during the 
}^ear of 1899. The tax rate increased about 20 per cent, and 
the number of new buildings was more than double that of the 
previous year; and a number of land owners gave as their 
reason for building the fact that the increased tax upon their 
vacant land rendered it unprofitable to hold it longer un- 
improved. It is alleged that there was an exception to this 
general tendency toward reduced rentals in some crowded sec- 
tions of the city, inhabited by laborers, who found it ex- 
tremely important to be near their work. It is said that 
rents were raised in these quarters, and that landlords asserted 
that they were obliged to raise the rentals because of the in- 
creased tax. While this may be true, it is perfectly obvious 
that the landlord could have raised the rent to the same extent 
if there had been no increase in the tax rate at all, so that in 
reality this apparent exception is not an exception. 

During the year 1898, in the borough of Brooklyn, there 
was a considerable decrease in taxation, but there is no evi- 
dence of any decrease in rentals. In fact, the evidence shows 
an increase rather than a decrease. 

There is no evidence that rentals are higher in cities where 
the tax rate is uniformly high than in cities where the tax 
rate is uniformly low, other conditions being the same. 

Where population is stationary or declining it is certain that 
a tax upon real estate is paid entirely by the owner of the real 
estate and does not at all increase rentals. When population 
is increasing the effect of a tax upon land appears to at least 
counteract the effect of a tax upon improvements, so that an 
increase in the tax rate does not increase rentals. 

One effect of the tax upon real estate is generally almost lost 
sight of, and it is one of the most important. So long as the 
tax rate remains at about the same point the tax upon the 
owners, who bought while that rate prevailed, is in reality no 
tax at all. The reason is that the buyer of a parcel of real 
estate pays a sum determined by the probable net return, and 



380 APPENDICES 

if the tax is low, and the net return high, the price will be 
high; if the tax is high, the net return will be correspond- 
ingly lower and the price proportionately affected. 

If the tax rate increases after the purchase of a parcel of 
real estate, the increase falls wholly upon the owner at the 
time the increase takes place. If the rate of taxation con- 
tinues at the increased rate and other conditions remain the 
same the owner will be obliged to accept a smaller price from 
a buyer, and the buyer, so long as the rate does not again in- 
crease, will practically pay no tax at all, as his purchase price 
will be as much less as the capitalized value of the increased 
annual tax. 

Conclusion 

The general conclusion of the whole matter is that taxes 
upon things capable of reproduction are paid by the consumers 
of the things taxed, and that taxes upon things not capable 
of reproduction, but of fixed quantity, are paid by the owners 
and only by those who are the owners at the time the tax is 
imposed. — From The Burdens of Local Taxation and Who 
Bears Them, by Lawson Purdy. 



APR 26 1913 



